Central Bank elixir isn’t certain – but expect volatility
THIS weekend’s economic symposium at Jackson Hole has the power to monumentally shake world markets, which is what voracious traders – subdued by the summer’s low trading volumes – will want to see. With both Ben Bernanke, chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank (ECB), due to speak at this year’s event, there should be ample opportunity for traders to catch pips on the back of their comments.
The eagerly anticipated annual event has become a significant fixture in the economic calendar, even more so in the crisis era. The remarks will give key insights on the future direction of US monetary policy, which will inevitably have global ramifications.
At the 2010 event, against the background of a fragile economy and chronically high unemployment, Bernanke outlined policy responses that firmly pointed to further quantitative easing. The markets were buoyed by the “additional monetary accommodation” at the Fed’s disposal.
The 2011 event was more oblique: details about the specific tools available to the Fed were light, initially leaving stimulus-hungry markets disappointed. However, markets breathed a sigh of relief after digesting the full implications of Bernanke’s speech and were recompensed with Operation Twist a few weeks later.
The outgoing ECB president, Jean-Claude Trichet, also appeared at last year’s event, but it was no swan song. Markets were becoming nervous about the escalating crisis bubbling away in Greece and Trichet had nothing game-changing to offer them.
One could be forgiven for thinking that this year will feel like déjà vu: parallels can easily be drawn.
TO EASE, OR NOT TO EASE
That is the question. Whether or not Bernanke will pull the trigger on a third round of quantitative easing, QE3, is a coin-flip. The Fed’s recent meeting minutes struck a dovish tone: “Additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”
The prospect of further monetary easing was quickly priced into global markets, but have they been too quick off the mark? David Morrison, market strategist at GFT Markets believes so: “Recent data, released after the Fed’s meeting, has surprised to the upside. There is an awful lot of complacency in the market and there is room for disappointment – gold and silver look particularly overextended.”
With the better than expected employment data, consumer confidence reaching highs not seen since 2008, stronger retail figures and equity market rallies, the US economy looks in a less perilous state than it was going into last year’s Jackson Hole. However, does this amount to a “substantial and sustainable strengthening” of the US economy?
The stimulus-hungry think not: although employment has improved, it still remains stubbornly above 8 per cent and has, in fact, slightly increased since April’s reading. Housing data, although favourable, is still weak.
Europe still remains a big risk to global stability. Shavaz Dhalla, financial trader at Spreadex, expects “some clarification from Draghi [as to the ECB’s approach] and probably an announcement of the capping of sovereign bond yields.”
Concrete news from “Super” Mario would elate European stocks at the beginning of the following week. Brenda Kelly, senior market strategist at CMC Markets believes “any QE will be bullish for European indices – particularly the banking sector – as well as euro-dollar. Any disappointing news will result in a sharp equity market correction.”
However, traders will need to carefully time their trade entry and exit. Draghi is speaking outside of market hours, adding another level of risk. Morrison cautions: “Investors need to be very wary of keeping open positions over the weekend.”
Over the course of the last year, traders will have learned to take comments from Eurozone policymakers with the utmost caution, since they have hardly been a paragon of reliability. Their dance has been foreseeably macabre: a “solution” is put forward and markets rally; shortly afterwards, it becomes clear that the “solution” doesn’t actually address the Eurozone’s long-term stability, or, will never be implemented (usually because Angela Merkel says nein); markets recoil and the crisis brings Europe a step closer to disaster; repeat ad nauseam.
Whatever the outcome, Jackson Hole is set to slam the door shut on the summer’s lull in trading volumes. Kelly says that trends will start to have more significance because “the direction of the moves will have much more conviction.”
Morrison agrees: “It looks like it will be a busy September, with the European finance ministers and ECB due to meet after Jackson Hole; the Bank of England and the Fed will meet again; and the Bundestag will rule on the European Stability Mechanism. Don’t forget the presidential elections and the looming fiscal cliff in the US.”
Lock and load, dear traders: hunting season is about to begin.
PIP HUNTING:
Some trading ideas from the experts:
■ David Morrison, market strategist, GFT Markets
With trading volumes set to pick up: “The Vix index looks good. Volatility is under-priced.”
■ Brenda Kelly, senior market strategist, CMC Markets
Stay hedged: “Any uncertainty from Mario Draghi will lead to a pop in German bunds.”
■ Shavaz Dhalla, financial trader, Spreadex
The self-described contrarian says: “I’m looking to short banks and miners, and take a long position in gold. September is going to be all about volatility.”