The Star Online: Business
The Star Online: Business |
- A comedown may be waiting after Fed high
- Fed's QE3 program seen totaling $600 billion
- Tens of thousands of Spaniards rally against spending cuts
| A comedown may be waiting after Fed high Posted: 15 Sep 2012 06:04 AM PDT NEW YORK: Comparing the Federal Reserve to a rehab clinic offering addicted investors a synthetic high has been a favorite of Wall Street wags ever since the first round of Fed stimulus nearly four years ago. The punch line is that you always need more and more to get the same high and each bout of euphoria is followed by a crashing comedown. After the frenetic reaction brought about by the announcement of the Fed's latest stimulus program - $40 billion pumped into the U.S. economy each month - the coming week is likely to bring a more sober period for markets as investors digest what it means in the longer run and turn their attention to the remainder of the year. That will include rancorous U.S. elections in November, wrangling over taxes and spending cuts and a slowdown in corporate earnings. "Right now we have this short-term euphoria. But then the question is where do we go from here," said Frank Fantozzi, chief executive of Planned Financial Services, an independent wealth manager in Cleveland. "I think after a week or so, if the underlying economic data doesn't change, you're going to see the market drop a bit and we'll continue to plod along until the election." The effect on markets of the European Central Bank's plan to buy government bonds of struggling euro zone countries, then the Fed's opened-ended commitment to spur growth have been breathtaking. The Dow and the S&P 500 reached the highest closing level in nearly five years while the Nasdaq marched to new 12-year highs. HEADY TERRITORY But in Friday's stock market action strong gains in the morning steadily eroded throughout the day, perhaps the first signs of fatigue creeping into the market. "We are starting to get into that heady territory where you need to be on the defensive," said Richard Ross, global technical strategist at Aubach Grayson in New York. "Trying to squeak out the last 5 percent of a move when there is potentially a 15 to 20 percent downside in my opinion is pretty dangerous stuff." Ross believes that equities, commodities and currencies are now approaching extreme levels of both price and momentum while geopolitical tensions in the Middle East are rising. Even though all the major stock market rallies since the financial crisis have coincided with new central bank efforts to stimulate the economy, not everyone is buying it. The latest data shows a moderate increase in short interest - bets that stocks will fall - across S&P 500 stocks during the last two weeks of August, a period when stocks were rallying on expectations of the Fed's announcement. Typically short interest inversely tracks the market. If investors were getting out of bets that stocks will fall, that would mean buying back those stocks and forcing the market higher. Data provided by Schaeffer's Investment Research, a Cincinnati-based research firm, shows that bets against the biggest 500 U.S. companies edged back to about 7.3 billion shares after falling from about 7.6 billion to 7.2 billion from the start of July through the end of August - a period when the market gained more than 3 percent. REDUCE VOLATILITY That uptick in short interest could be significant. From the middle of September 2011 through the end of May this year, short interest on S&P 500 stocks fell like a stone to about 6 billion shares. During that period the S&P hit a four-year high, rising more than 20 percent from trough to peak. One side effect of the Fed's bond-buying should be to reduce volatility in markets. That means the CBOE VIX volatility index <.VIX> should remain close to the five-year lows it hit this summer. In August it fell as low as 13.30. Yet activity in the options market shows some very bold bets that volatility could sky rocket in the months ahead. Call option buying on the VIX - bets the index will rise - is close to a record high at 5.182 million contracts, according to Schaeffer's data. The record is 5.249 million set in August. The most actively traded VIX calls on the Chicago Board Options Exchange were October calls with a strike price of 60. Those also had the highest open interest. The VIX would need to rocket more than 300 percent by mid-October, hitting its highest level in about four years, for that trade to break even. On the face of it a bet like that may seem little better than betting your 401(k) on a single number on the roulette table, but it does reveal more bearishness creeping into the market as stock indexes march to new highs. Open interest, or outstanding contracts, on the October VIX calls with a strike price of 60 was 37,000 while traded volume was around 40,000. Many of those were bought in blocks of 2000 to 5000 for 5 cents each, suggesting a single buyer, according to Todd Salamone, vice president of research at Schaeffer's. "Somebody's really playing a disaster by October," said Salamone. "If they're looking for something that big, that is not a portfolio hedge because that would be a lot of downside in the market before that hedge would actually kick in." A lot of the market action over the coming months will depend on whether the Fed's stimulus program succeeds in boosting the economy. Data on the housing market in the coming week is expected to show a continuing improvement. Economists in a Reuters poll expect the National Association of Home Builders Index to tick up in September when the data is released on Tuesday. On Wednesday both housing starts and existing-home sales are expected to increase. Early manufacturing data for September, however, is not expected to be so robust. Both the Empire State index and the Philadelphia Fed index are tipped to show contraction. That would follow the sharpest drop in U.S. manufacturing in more than three years in August, which was also the third consecutive month of contraction. "Let's face it - we are in truly unchartered waters here," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York. - Reuters |
| Fed's QE3 program seen totaling $600 billion Posted: 15 Sep 2012 06:02 AM PDT NEW YORK: The Federal Reserve will buy a total of $600 billion of bonds under its new stimulus program announced Thursday, known as QE3, and will look for a U.S. unemployment rate of 7 percent before it halts the program, according to the median of forecasts from a Reuters poll on Friday. Forecasts from 52 economists for the ultimate size of the program ranged from $250 billion to $2 trillion, the poll found. The Fed said on Thursday it was launching a new program of buying $40 billion a month of mortgage-backed securities bonds that would be open ended as it sought to "improve substantially" the outlook for the labor market. The move, leaving the program open-ended until the jobs market improves, was a "revolutionary shift in the Fed's policy reaction function," said Michael Gregory, senior economist at BMO Capital Markets in Toronto. He added that there is "much more (quantitative) easing to come." Within the poll, the median of forecasts from 13 primary dealers -- the large Wall Street institutions that do business directly with the Fed -- was for a total QE3 size of $750 billion. In two prior rounds of quantitative easing, the Fed bought $2.3 trillion in mortgage and government debt in a bid to push down borrowing costs. The median of forecasts from 47 economists who answered a question on an unemployment target was for the jobless rate to dip to 7 percent before the Fed considers shutting down QE3. Some economists were reluctant to peg an exact unemployment level, saying Fed Chairman Ben Bernanke and the Fed would consider several aspects of the labor market, including the rate of jobs growth, when considering ending QE3. "Bernanke made it clear in his press conference that the unemployment rate is not the only job market indicator that will influence their reaction function," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York. "In other words, we will likely have to see material improvement in labor force participation, employment-to-population, and net job gains in order for the Fed to pare back purchases," he said. The unemployment rate stood at 8.1 percent in August and has remained above 8 percent since February 2009. Of 58 economists polled on Friday, 49 said the Fed would buy more Treasuries once its "Operation Twist" stimulus program finishes in December. Under Twist, the Fed is selling shorter-dated Treasuries and using the proceeds to buy longer-dated U.S. government debt in an effort to reduce longer-term borrowing costs like those on mortgages. "Until the labor market outlook improves 'substantially', both MBS and Treasury purchases are likely once Operation Twist is completed. We expect to see the Fed buy a combination of the two next year," said Dana Saporta, economist at Credit Suisse in New York. Fifty-two of 58 economists said they have not revised their expectations for the unemployment level at the end of 2013 and 2014 in the wake of the QE3 announcement, while six did revise their outlooks for the unemployment rate. "We continue to believe that monetary policy is ineffective in influencing the fundamental economic backdrop," RBC's Oubina said. One of the six that did change their unemployment projections following the QE3 announcement, BMO Capital Markets, reduced its outlook for the jobless rate to 7.8 percent in the fourth quarter of 2013 from its original estimate of 8.2 percent. - Reuters |
| Tens of thousands of Spaniards rally against spending cuts Posted: 15 Sep 2012 05:59 AM PDT MADRID: Tens of thousands of Spaniards rallied in Madrid on Saturday to protest against spending cuts and tax rises in a country reeling from high unemployment and a grueling recession. Teachers, nurses and social services workers thronged the capital's central Plaza Colon a day after Spain said it would present new economic reforms at the end of September likely to contain more austerity measures. The cuts are seen as a precursor to an economic program which Spain will have to implement in return for receiving support from euro zone rescue funds and the European Central Bank to help lower its borrowing costs. The demonstrators, from all over Spain, chanted, sang and listened to speeches from union leaders. Some blew whistles and waved banners reading 'Enough!' and 'They're sinking the country' to protest against the spending cuts in health, education and social services. "There is no area of my work which has not been affected by the cuts," said Jorge, a 52-year-old doctor from Valencia who declined to give his surname. He said his salary had shrunk around 30 percent because of measures. "It's a drastic reduction in the quality of service for patients, it's terrible," he added. Others said they feared for the future of their children in a country where one in four is out of work and mired in a second recession in three years. "Spain has gone back to the 1950s, when the Spanish had to go to Germany in search of work," said 50-year-old teacher Adelaida Liviano, who said half of her pupils had started the year without school books because of the scrapping of subsidies. Spain announced a package of spending cuts and tax hikes worth 56 billion euros in July but many economists still expect the euro zone's fourth largest economy to miss its 2012 deficit target. It has accepted a European credit line of up to 100 billion euros to prop up its ailing banks as it seeks to avoid a full-blown bail-out which the euro zone would struggle to afford. However, most analysts and policymakers believe it is only a matter of time before Spain will require more international help to lower its punishing borrowing costs. Everyday living costs like heating, phone bills, clothes and haircuts all became more expensive at the start of the month after a hike in value-added tax. "The government is aware that is it asking for sacrifices from Spaniards, but these sacrifices are absolutely unavoidable," Economy Minister Luis de Guindos said at a European finance minister meeting in Cyprus on Saturday. Police and city officials have a policy of not giving crowd counts for demonstrations. A Reuters witness estimated the crowds in tens of thousands. - Reuters |
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