LIBYA OFFERS SUPPORT, BUT RISKS REMAIN
GLOBAL equity markets bounced yesterday offering much-needed relief for bruised investors. After last week’s dismal performance, the major indices were technically oversold. Consequently, traders took the news that hostilities in Libya could be about to end as an excuse to pile back into stocks. But despite the rally, it’s unlikely that we’ve seen the market bottom. Investors are positioning themselves for a world of slower growth as analysts fall over themselves to downgrade their global GDP estimates. In addition, the tail end of the US second quarter earnings season brought some notable disappointments, with Dell and Hewlett-Packard both downgrading their outlooks for the rest of the year.
The main event this week is the Jackson Hole Economic Symposium. Twelve months ago, Ben Bernanke used the event to announce the Federal Reserve’s intention to launch a second round of quantitative easing. This triggered a sharp rally in dollar-denominated assets and global equities. Now investors are wondering if the Federal Reserve Chairman will provide another boost to financial markets. However, it won’t be as easy this time round. For a start, we know that there are three members of the FOMC who argued against the decision to announce that the Fed funds rate will be kept below 0.25 per cent until the middle of 2013. Additionally, any further extension of the Fed’s balance sheet is likely to lead to condemnation both domestically and internationally. The Fed is coming under intense political scrutiny ahead of next year’s presidential election, while many countries blamed QE2 for currency appreciation and rising commodity prices. Meanwhile, last week’s CPI and PPI numbers showed that inflation is also an issue for the US. On top of all this, there is the ongoing argument that the Fed’s previous asset purchase programmes have helped Wall Street at the expense of Main Street.
Last week, European leaders Merkel and Sarkozy followed the US debt ceiling fudge by saying “no” to both an increased EFSF and eurobonds. With politicians out of the markets for now, if the Fed refrains from another round of stimulus, then we could see technical analysis regain its importance. For the S&P, that means watching support between 1,100 and 1,120. A break below here would really mean trouble. But should this rally continue, watch for resistance between 1,200 and 1,220.