This goes right to my point – What (or Who) is driving the mkts? Economics or Uncle Benny and the Jets? Wed and Thurs saw the mkts sell off – I would argue that they did not sell off hard – because investors remain convinced that the FED will not just walk away or begin a pullout just yet......(confirmed by both Benny and Bullard) - there was no explosion in real volumes, there was no real pressure to “get out”, - it was more just a breather – but it also shows that the nervousness continues – any sense that the Fed is readying to pull out – sends tremors thru investor minds –around the world as we witnessed - Let’s face it – the mkt is addicted to the Kool Aid ($85 bil/mo) – so the problem is: Has the Fed backed themselves into a corner?
The perpetual QE has been here since July 2012 and as discussed is expected to continue for “a long time”…..if this continues for another two years then the Fed will have printed some $2 tril….(24 x 85 bil) in addition to the $680 bil so far bringing the total to just under $3 tril. And this means what exactly? It means that all of this free money has to go somewhere – commodities and equities sound familiar? This free money has inflated the values way beyond any level that would be achieved under a mkt without intervention…..and now we are seeing the another worldwide recession – everywhere except the US, UK and Germany – or are we?
Over the weekend - we learned that Moody's stripped the UK of its AAA rating....citing concern that the country's debt will continue to grow - not expecting the debt burden to stabilize until 2016... Could the UK be the next "problem child"? For so long - France, Italy and Spain have been considered the problem children - are we now including the UK leading many to question the validity of such strong austerity measures? Yes this is a psychological blow to the current gov't - but it also re-affirms the need to stay the course as noted by George Osborne - Chairman of the Exchequer -
"Tonight we have a stark reminder of the debt problems facing our country...far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."
In Italy - the vote continues for a new leader...look for preliminary results after 3 pm today - some combination of Pier Luigi Bersani & Mario Monti appears to be the answer.....Topless women protesting Berlusconi created a bit of chaos outside the polling station as they screamed "Basta Berlusconi" (Enough of Berlusconi) adding a bit of excitement to the process....Despite all of the antics - Italians are in a very serious mood expressing concern over the current state of affairs....so many concerned about the danger in weak leadership at this time in history. An inconclusive election (unlikely) - would produce instability across the region.
In 4 days – count them – 4 days – sequestration will be the way of the land….will it be the disaster that our President is claiming? Will the GOP cave? Is what is happening across the EZ just a precursor of what is to come here at home? The mkt is telling you either it does not believe sequestration will happen or that it means nothing - US futures are +8 pts right now at 1522 - ….Can that be true? Are we just ignoring the warning signs - do we not want to see the sign? The WH has been using the time to detail the human cost of the supposed cuts - "Toddlers to Teachers Face Pain from Budget Cuts" - 350 teachers in Ohio, 4200 children in Georgia without vaccines, 400 victims of domestic violence in Kentucky with no services.... Why are we resorting to alarmist tactics? How come lawmakers on both sides are not coming to the table? Exactly why were they in recess for two weeks? Someone has some "splainin to do..." Americans should be outraged at every single member of congress.....
Overnight in Asia - mkts rocket higher - even as China's Flash PMI shows slower growth for the 4th consecutive month.........Japan leading the way +2.4%...as Abe intends to nominate Haruhiko Kuroda as the next BoJ Governor....As you might well imagine - he is very supportive of aggressive stimulation...Hong Kong + 0.17%, China + 0.5% and ASX +0.75%.
In Europe - mkts shrugging off the downgrade - and I mean really shrugging it off....all mkts in very positive territory - credit being given to news out of Asia as well as the Italian elections and the expectation of that Pro-Reform Center Left Coalition (Bersani/Monti). FTSE + 0.7%, CAC 40 +1.8%, DAX +2.5%, EUROSTOXX +2.17%, SPAIN + 1.8% and ITALY +2.5%.
As noted - US futures are moving broadly higher at the moment +7 pts at 1522....all this despite the coming spending cuts....indicating that the mkt does not seem to care....seemingly believing that the "alarmist" position is quite exaggerated - as the cuts in the current fiscal yr would total $44 bil (or half of the total) representing just 0.3% of GDP - and just FYI - the cuts will not touch any of the entitlement programs which are the real primary source of our long term problems....but investors do not seem to care - until they do....Asia and Italy seem to be providing the impetus for today's move - as investors completely ignore the UK downgrade and the negative chatter about US cuts..... Look for the mkt to test the most recent high of 1530 as it looks for a reason to move higher even amid the economic chaos that surrounds us....It is illogical at times - but we have the central banks to hold responsible - again remember the action last week when it was suggested that the Fed would begin an early exit..... We now remain in the 1515/1530 short term range - with the broader range now being 1490/1565.