By
Marc Chandler
:
In golf, it is said "drive for show and putt for dough." In
learning to drive an auto, one is often advised the exact opposite.
"Aim high in steering", one is told, which means that rather than
look a few feet in front of the car, look further down the
road.
Given current market conditions, summer vacations and the
numerous key events in September, investors are better served by
the auto advice than the golf advice. To facilitate this, we
summarize our main G10 views here:
1. The FOMC rate decision is September 13.
Ahead of it, participants will look at Bernanke's Jackson Hole
speech at end of August for insight. In 2010, he tipped his hand.
We do not expect him to do so this year as the key to the FOMC
action is the jobs market and the monthly non-farm payroll report
due September 7. We suspect the economy created roughly the same
number of net private sector jobs as it did in July (172k). Other
data (like retail sales and industrial production) also suggests
that the pattern seen over the last couple of years of weakness in
H1 is followed by a stronger, even if moderate, H2.
Our base case was that the Fed would not opt for QE3 this year,
but recognized that the third quarter was the most likely window of
opportunity. There are other measures the Fed can take instead of
Treasury or MBS purchases. If job growth does pick up for the
second consecutive month, given the trade-offs with QE and the
near-record low interest rates, we suspect the Fed will likely rely
on these other measures, including future guidance.
2. We are concerned that the approaching fiscal cliff will
weigh on business investment and hiring decisions.
However, mitigating this to some extent is the belief that some
compromise will be worked out to extend the temporary tax cuts.
Previously, it seemed that after September's key European events,
the market's attention would shift to the US elections and fiscal
cliff. However, it seems that this might not take place until
mid-October, after (another) European summit. Given the polls in
the half dozen or so swing states, we expect President Obama to be
re-elected. Our best information suggests a split in Congress is
the most likely outcome.
3. Since the end of last year, we suggested the investment
climate in Europe would be characterized by three no's: No ECB
backstop for sovereigns. No common European bond. No eurozone break
up. This remains our base case.
Of course, we recognize that the ECB may buy sovereign bonds, but
in a different way than Trichet did. Draghi outlined conditions,
which include a country formally requesting EFSF support for its
bonds and signing a memorandum of understanding. This seems to be
less backstop and more a different form of aid. We also recognize
that no common European bond also means no collectivization of
debt.
Although there are some officials in some of the creditor
countries that seem to want to evict Greece, but among the European
elite there does not appear to be a consensus for this. We expect
Greece to agree to the additional savings measures for 2013-2014
and that the Troika will authorize the next tranche, but this seems
unlikely before October.
4. There is some speculation that Spain will formally
request assistance within days, but we are skeptical.
It does not make much sense to do so ahead of the auditors' report
on the banks' capital needs. Moody's is expected to finish its
review of Spain's credit rating in the Sept-Oct period. It
currently has the lowest investment grade rating. A cut in the
rating would likely be a market factor, even if one accepts that
rating agencies sovereign ratings are compromised by i) a poor
track record for timeliness, and ii) unlike its corporate ratings,
the sovereign ratings rely exclusively on publicly available
information.
5. We expect EU officials to recognize, perhaps in October,
that Portugal needs some extension of its program as it is most
unlikely to be able to return to the capital markets as soon as had
been assumed in its aid package.
Cyprus package may also be arranged by the October EU summit.
Slovenia may also need assistance, but it is not clear yet whether
this is a 2012 or a 2013 event.
6. By the start of Q4, we look Italian politics to heat up
as political parties jockey to replace Monti's technocrat
government next spring.
There is concern that some of the reform initiated will be diluted
if not reversed. Although Spanish and Italian bonds have been
highly correlated, we suspect if Spain does formally request EFSF
assistance to push yields lower that the two are decoupled and
Italy comes under more pressure.
7. We argue the creditor-debtor axis is the main division
in Europe
. France's interests are more aligned with the debtors. We suspect
that before the crisis in Europe is over, France will be
challenged. However, this is not taking place now. French bonds
have been trading more like German bunds than Spanish bonos.
8. While accepting that the 0.7% contraction in Q2 UK GDP
overstates the contraction, we do not see where the impetus from
growth will arise.
The poor economic performance will cause greater strains in the
coalition. While a break up is not the most likely scenario, the
risks of such will likely increase in the coming months. An
extension of QE may be announced before the current gilt purchase
plan is completed in November.
9. We expect the ECB to cut the refi rate to 50 bp and to
unveil a new collateral framework.
We do not expect it to cut the deposit rate below zero. If it does
buy sovereign bonds, we expect it to continue to sterilize the
operation, but will probably have to offer longer than 7-day repo
operations, given the zero deposit rate.
10. The Bank of Japan is under pressure to step up its
asset purchases to achieve its inflation target
. While it is possible, the BOJ still seems reluctant. However, as
the reconstruction efforts ease, the economy is poised to weaken
and that would seem to be a more likely opportunity. That said, the
BOJ is encountering some technical difficulties in implementing its
QE and some adjustment can be seen earlier. Prime Minister Noda
spent a great deal of his limited political capital on the passage
of the controversial retail sales tax hike. He may face a
leadership challenge within the DPJ.
11. Our Q3 forecasts, published at the end of June,
called for the euro to finish September near $1.19, and sterling
to finish near $1.52 and the dollar to finish near JPY78. With
the caveat of the path dependency of forecast, our year-end
targets were $1.24 and $1.56 for the euro and sterling,
respectively, and JPY79 for the dollar-yen.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
See also
5 Stocks To Trade, What's Next For The Market
on seekingalpha.com