16 September 2013
The Fed announces a program of tapering its bond purchases at the conclusion to this Tuesday/Wednesday’s meeting. This remains the most important even of the month and arguably the year. In current market conditions, the longer term Capital Accumulators and Capital Escalators, remain attractive investment vehicles to gain equity exposure. Coupling the QPSA and the PII RESI offers an attractive blend of yield and exposure to both the Top40 index as well as the Resource index.
Expectations are mixed, but it seems bonds are priced for up to $40bn of monthly QE withdrawal, whilst some think on evidence of recent jobs data, there’ll be a slower taper. Others are worried that the impact on Treasuries could be exaggerated by thinner liquidity – harmed by Volcker rule that has prohibited proprietary trading and drastically reduced banks’ inventory – but will only really be evident in wider spreads once the Fed steps away. Gold meanwhile is pricing for inevitability of end of money printing by next year. Either way Wednesday is key for markets.
The week is full of important events with, the FOMC set to meet, and US payrolls due on Friday. On the local market the SARB announces rates on Thursday, also look out for non-farm payrolls on Tuesday and CPI data on Wednesday. ECB President Draghi speaks this morning at 09:00 BST. He’s in Germany talking at a small and medium sized business conference. It would seem very unlikely that he will discuss monetary policy in any detail. There’s German elections this Sunday and any comments about future monetary policy could be criticised for their political connotations. It might also mean that Draghi will have to be careful in what he says about the developing recovery in the euro zone and the possibility of further financial aid, to Greece, for instance. With all this in mind, we’re expecting a pretty non-committal speech and hence something that’s not going to have a bearing on the markets.
There’s arguably been four risks facing the market recently: Fed tapering, the Fed Chair nomination, Syria and the debt ceiling. Two of these have eased considerably over the weekend with Summers pulling out of the Fed race and the US and Russia agreeing to back a long-term plan for Syria to destroy its chemical weapons. On tapering, we had thought that political risks had shifted the odds of tapering towards December. But this is no longer the case and hence it does seem most likely to us that a—small amount—of tapering will start from the September meeting, We do think that the market can take this in its stride, perhaps helped by the weekend developments with respect to Summers and Syria. On the debt ceiling, Democrats in Congress seem to have blocked Summers, not the Republicans and hence we doubt that the issue will rebound badly on the debt ceiling issue. Nonetheless, it is still hard to be confident that Congress will get the job done in time.