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Archive for June, 2013

Could this develop into a battle of wills?

Tue, 25th Jun 2013 Leave a comment

Chart of Dow Jones at 24th June 2013There were some interesting comments from the Dallas Fed president in the FT today. He said that it was expected that the market would react strongly to the withdrawal of QE, but that it can’t go on forever. It sounds to me like the Fed is anticipating that the market will try to force them to change their mind. Mr. Market is certainly a QE junkie and will do whatever it takes to get his next fix, so maybe this dip could go further than I suggested. In the US, a booming stock market encourages consumer spending, so the Fed will have to consider the implications of a falling stock market for the recovery. However, perhaps a more significant consideration is that government bonds are also falling, with the yield on 10 year treasuries rising a quarter from 2% a month ago to 2.5% now. This is effectively the interest rate the government has to pay to both borrow new, and rollover existing, debt, and, if this continues, it could cause the government a large headache. So the Fed may well have to start buying government bonds again to reduce borrowing costs. In this battle, I feel Mr. Market has the upper hand, but the Fed is right to want to stop QE as, the longer it goes on, the more it distorts the market and the bigger the correction will be when the plug is finally pulled.

Time for a Dow correction

Thu, 20th Jun 2013 Leave a comment

Chart of Dow Jones at close on the 19th June 2013Well, Ben Bernanke went further than a lot of people expected last night and said, as well as reiterating that QE should slow this year, that it should stop entirely by the middle of next year (assuming the US recovery continues). This has spooked the markets with the Dow down 200 points last night and the same again so far today. We’ve had a good run lately, so we are probably due a correction anyway, and I can see the Dow falling below the 200 day moving average to around 13,500 (about 12%). I don’t think there is anything too much to worry about; this is just part of the normal ebb and flow of the market.

Chart of FTSE-100 at 19th June 2013

This would probably bring the FTSE down to around 5,400. I would regard that as a buying opportunity.

Has “tapering” burst the QE bubble?

Tue, 11th Jun 2013 Leave a comment

Chart of FTSE-100 at 10th June 2013And is it time to panic after all? The FTSE has fallen by about 7.5% and shows no signs of rebounding (it’s down another 100 points so far today and still losing ground on the Dow), so it looks like it could fall significantly further. This decline has been brought about by talk of “tapering” QE in the US which just goes to show how dependent stock markets have become on the free money being pumped into them. To be honest, I’m not seeing any patterns in the chart at the moment, so I can’t really suggest what is likely to happen. The US authorities have suggested that it is time to wean the markets off QE so we could see a reluctance from them to act should the downturn continue.

Chart of Dow Jones at 10th June 2013The reason I had previously believed this decline would not be significant is that the Dow has not reacted anything like as strongly as the FTSE, having fallen only 3% so far. It still looks like it is consolidating above 15,000 like I suggested it might at the beginning of May. However sentiment seems to be turning negative with talk of a slowdown in Chinese growth coming into the picture. So the Dow could also fall further, but it is unusual for markets to turn so sharply after a strong run so I am still expecting it to bounce back. There is normally a sideways period before a fundamental turn in sentiment, so, once the market gets used to the idea of QE being reduced slightly, I suspect there could be quite a quick recovery. There is strong support just above 13,000 so I would be surprised if the Dow goes below that level and it may turn around way before then. It looks like I’ll have to play this one by ear!