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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.

 
September crunch time for rallying summer markets

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.

Fed watching

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.

Unpredictable politicians

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.

Over-exuberance

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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22 comments so far. Why not have your say?

joe stalin

Aug 22, 2012 at 13:26

So we have one down day and the worlds is coming to an end and everybody goes piling back into the bond market for "safety". Well it is probably little more than a technical pull back given the performance to date and orchestrated by US index players. Sadly the correction for what it is worth won't be material enough to prompt aggressive buying thereby facillitating those that are thriving in the current low volume rumour driven market.

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Geoff Downs

Aug 22, 2012 at 13:49

It may well be a technical pull back, after all the world's politicians and bankers are on your side. Hey, hold on a minute, weren't these the people that got us in this mess in the first place. Don't worry though Joe they are doing their best to make you think there's easy money to be made out there, why don't we all join in?

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William Bishop

Aug 22, 2012 at 17:26

It will be interesting to see how far the absence of background news in August has lulled investors into a false sense of security. In the US, for instance, both those looking for economic improvement, and those hoping that weakness will led to another round of QE from the Fed, have somehow managed to stay fairly happy at the same time.

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Anthony O' Grady

Aug 22, 2012 at 18:57

increasing my cash allocation already!!!

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jeffian

Aug 22, 2012 at 20:05

I still remain of the view that an unpleasant 'event' in the Eurozone is a given and have positioned myself to pick up the pieces. The ONLY solution to keeping the existing Eurozone intact is for the Germans to undertake to pick up the tab unconditionally, and I just can't see them doing that. Even if they did, that would condemn Europe to years of stagnation whilst the stresses between North and South sorted themselves out. The 'Grexit' seems inevitable, and I foresee short-term mayhem whilst the implications of that work through. In the meantime - "Only this week the ECB denied that it was hatching plans to cap the high bond yields of countries such as Spain". So how does that (capping high bond yields) work? Sounds like ECB vs The Markets. Do they have deep enough pockets? (Yes, that's you again, Heinrich.)

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Geoff Downs

Aug 22, 2012 at 20:17

Despite all this the markets keep going up. The Federal Reserve suggesting tonight more money printing. The Bankers and Politicians still trying to make investors think they can sort this mess while debt is not being tackled. You couldn't make this up.

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snoekie

Aug 22, 2012 at 20:24

"make you think there's easy money", not for me as I think that the real 'correction has yet to happen. Hark back to 2008 when there was a false dawn. I woke up toooooooooooo early !

IMHO, now is the time to conserve your cash, if you have any, and keep your powder dry.

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Geoff Downs

Aug 22, 2012 at 20:36

You are right to conserve cash. This rally and the Federal Reserve's action though will lull people into this market. They may make a bit of money for a while but you have to fear for them long term.

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Anthony O' Grady

Aug 22, 2012 at 22:13

Agreed. What really makes me giggle is listening to equity fund managers and financial advisors who are desperate to market equity funds. Don't get me totally wrong, I don't share Bill Gross's view (another vested interest) that the cult of the equity is dead, but in the near term what is the likely prognosis for equities? The answer is limited further upside and massive risk to the downside. As Mark Faber says, in 12 months time one might find a much more attractive environment in which to buy equities.

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jeffian

Aug 22, 2012 at 22:46

If anyone is still labouring under the delusion the the ECB is the answer, they clearly didn't see this in the Telegraph a few days ago -

""Last week Greece completed its largest debt sale in two years, ensuring that it has sufficient funds to repay €3.1bn in bonds held by the ECB which mature today and avoiding a default.

The Greek Public Debt Management Agency sold €4.1 of Treasury bills. However, buyers were mainly Greek banks, which essentially borrowed from the ECB at one window, through the Greek central bank, to repay it through another."

You couldn't make it up.

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Geoff Downs

Aug 22, 2012 at 23:05

The vast majority of the so called experts are telling us stock markets are likely to rise and equities are the best bet, for the following reasons:

Equities are cheap.

Sentiment is bearish

Other investments sush as bonds are expensive.

Cash gives you less than inflation.

QE will help the economy.

The US Economy is recovering.

Does the above ring true or is this the propaganda of the investment industry?

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snoekie

Aug 23, 2012 at 04:46

No Geof, and the Greeks swaps are swapping good money for worthless debt, or is it paying off worthless debt, created by the ECB with a few strokes, well rather more than a few, 10+ for good money. More haircuts and soon the world will be populated with baldies- more likely scalped so that no more hair can grow, with apologies to those challenged.

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joe stalin

Aug 23, 2012 at 14:54

1400 on the S&P is where all the contracts are sitting we go there first for the payday and then well who knows but probably higher is my guess.

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Anonymous 1 needed this 'off the record'

Aug 25, 2012 at 10:59

what options do the failing over governed western countries have to feed the poor, but to print more money, tax is crippling, business will continue to move offshore under these conditions, stock market is 20% inflated at least, a mess of the first order.... some servere corrections needed, but think we will just have continued inflation....

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wayne roberts

Aug 25, 2012 at 13:06

One day all the worlds problems will be fixed and the fearful investor will step out and find he has missed the biggest bull market ever.. all the worlds major economies are bowing to market demands and doing whatever is necessary, I wouldn't want to be the bear standing in front of that.. the road that the can is being kicked down can go on forever..

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Geoff Downs

Aug 25, 2012 at 13:32

Wayne, No my friend it cannot. If you think the debt problem can be sorted please tell us how. If you have the answer you could get a call from Mr King.

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mark douglas

Aug 25, 2012 at 14:14

well try this one on the debt problem.

If all the indebted countries declare themselves bankrupt sorry default at the same time, what's leftover, property, food, gold etc company share certificates and lots of other things too, all we would need to do is to apologise to those who lost their money and create a bunch of new currencies and start all over again.

How bloody stupid does that sound?

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wayne roberts

Aug 25, 2012 at 14:18

The debt problem could be sorted by rebuilding the British Empire - conquering countries, stealing their wealth and taxing them. Thats how we got to be rich in the first place.

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Geoff Downs

Aug 25, 2012 at 14:27

Where would we get the money to buy the weapons we would need to conquer these countries. Joking apart, easy credit and massive debt has fuelled all asset prices over many years. If you believe that will carry on then you should of course continue to buy equities, commodities and property. If like me you think the party is over then it's batten down the hatches time.

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mark douglas

Aug 25, 2012 at 14:45

Wayne Robets you are being quite silly now, please even if it's quite a romantic idea.

whereas me idea will actualy be the only solution if the economies concerned just keep kicking the can down the road, hyper-inflation would have the same effect I supose. Not our fault if the Chinees can't take a joke., they had very little 30 years ago.

what are people suposed to batten down the hatches with, food ,gold what?

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wayne roberts

Aug 25, 2012 at 15:15

We don't need to do it with weapons, the US has done it with iPhones, I'm sure our great leaders will come up with something..

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Graham Barlow

Aug 28, 2012 at 10:26

One thing for sure the British Government will have to increase taxation to even higher levels to avoid a downgrade in the International markets. The revenue flows are on the way down as people and companies reduce their tax bills with radical action. Companies taking the opportunity to write off every rotten egg in the portfolio and individuals addressing their own income tax, and how to reduce it.. Why earn money and loose your tax free allowances for example. There is more than one way to skin a cat, and the mass of large tax payers are currently addressing tjust that.. The upshot is that revenues will continue to fall and accelerate over the coming months. July, normally a big inflow month just demonstrates what is going on. Of course Osborne will never admit it, but the British Public has got wise to the fact that they are over taxed on a mega scale, and the only way to cut Govrernment expenditure is starve them of funds.

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