Tuesday, August 27, 2013
Syria jitters have added to the perennial Fed Taper issue for the
market, though the Syria situation is unlikely to morph into
become a full-blown war any time soon. That said, this issue adds
another element of uncertainty in this seasonally low-volume
period for the stock market ahead of the Labor Day weekend.
There are no good solutions to the Syria problem. From the
perspective of strategic U.S. interests, victory for either side
in the Syrian civil war is problematic. This is the primary
reason, in addition to war-weariness in the country, why the U.S.
hasn't intervened already, despite the enormous human cost of the
conflict. For the sake American credibility in the region,
particularly given the ongoing conflict with Iran, the Obama
administration needs to be seen to 'punish' the Assad regime for
using chemical weapons on its own people. But I would be
surprised if the 'punishment' is anything more than a few missile
hits to Assad regime assets.
What this means is that there will be more noise and saber
rattling than actual military action any time soon, which means
more fog and uncertainty for the markets. The Syrian situation
adds to existing sources of uncertainty about a potentially
destabilizing replay of the 2011 debt ceiling debate and the
future of the Fed's easy money policy. The leadership transition
at the Fed adds to this mix of uncertainty.
My sense is that the market is smart enough to see through the
partisan and acrimonious debt ceiling debate and price in an
eventual last-minute resolution along the lines of the Fiscal
Cliff and Sequester. The Taper issue is potentially more material
as it could signify a change in the Fed's monetary policy stance.
The sharp rise in bond yields over the last three months confirms
that the bond market sees the Taper question as the start of
monetary policy normalization.
The Fed has been a pillar of support in the stock market's rise
to recent all-time high levels. Given the Fed's critical role all
along, it is reasonable to doubt the sustainability of the stock
market momentum in a backdrop of rising bond yields and lack of
Director of Research
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