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September crunch time for rallying summer markets
The summer stock market rally has been based on flimsy foundations. September brings a string of potentially market-defining events.
What happens in September? That’s what many investors and market commentators are now pondering.
Even amid weak economic data, markets have rallied over the summer on particularly thin volumes, boosted mostly by flimsy hopes of support from central banks. European equities are up nearly 14% since a three-month slump ended in June, and the FTSE 100 has rallied 9% in the past two months.
But next month brings several potentially market-jolting meetings and decisions across Europe.
Alongside a string of high-level eurozone meetings by politicians fresh from their holidays, key events include a German court decision on the European Stability Mechanism, the eurozone’s permanent bailout fund that replaces the EFSF. Meanwhile, Spain will publish an audit of its struggling banking system, and the Troika ( European Union, European Central Bank and International Monetary Fund) will decide on whether Greece deserves more financial aid.
Investors are also pinning their hopes on action from the US Federal Reserve, when its rate-setting committee meets in mid-September. ‘The two-month rally in risky assets is consistent with markets having gone some way to pricing in another round of QE, as well as substantial action from the ECB’, commented BNP Paribas’s Bricklin Dwyer.
After some better recent economic data though, the Fed could disappoint. ‘Doubts are starting to creep in amongst some in the market as to whether the Fed will be ready to launch a new program in September’, Dwyer added.
Meanwhile, the Chinese authorities continue to keep hopes of more monetary stimulus alive, stringing global markets along. ‘All [monetary policy] tools must be made available,’ Zhou Xiaochuan, governor of the People's Bank of China, said today, according to Reuters. The world’s richest central bank has a tendency to surprise investors.
Most worrying to investors is their dependency on eurozone politicians to keep the rally alive. Analysts at UBS write in a note today: ‘We find politicians’ behaviour, particularly in the eurozone, difficult to forecast. Therefore, while we see value in European equities on a long-term horizon, tactically, we are slightly concerned with markets starting to look overbought on some short-term indicators.’
UBS wants to see a tough wish delivered list before it’ll upgrade its market forecast, which currently sees the FTSE 100 rise only three points from the current level of 5,797 by the end of the year: Spain needs to seek a full country bailout, the European Central Bank must then take action to lower Spanish bond yields ‘in a credible and sustainable fashion’, and economic data must stabilise.
Only this week the ECB denied that it was hatching plans to cap the high bond yields of countries such as Spain. But investors weren’t convinced that this denial was final. ‘It was coded,’ said Mike van Dulken, head of research at Accendo Markets, who said that yesterday thinly traded markets were still being driven by speculation that the ECB would act, as promised by chief Mario Draghi.
Traders in other asset classes – the oil price in particular has rallied alongside equity markets – worry about this over-exuberance. ‘The oil price is caught up in European debt optimism… the market could get ahead of itself,’ said Saxo Bank commodity strategist Ole Hansen.
Joshua Raymond, chief market strategist at City Index, said the key events for markets in the coming weeks include Fed chairman Ben Bernanke’s speech in the Wyoming town of Jackson Hole at the end of August – a closely watched meeting of global economic big shots – and whether a reluctant Bundesbank gives its support to Draghi’s proposals, amid mixed signals from the German authorities.
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