Michael Barton

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Sunday, September 23, 2012

Markets on Hold as World waits for an Economic Turnaround

As widely forecast last week, the Bank of Japan followed the lead of the ECB and the Fed by announcing an increase in its quantitative easing program. The world’s markets are now in a phase of treading water as they wait to see what effect the massive proposed injection of cash around the globe will have.

Over the last three weeks the ECB has announced a never ending bond buying program, and the Fed that it will buy $40 billion of mortgage backed securities every month with a ‘zero’ interest rate policy through to 2015: the so called QE3 Program.  Now the BoJ has increased its own asset buying program  to 80 trillion Yen form 70 trillion, and extended it through to the end of 2013.

Recent economic figures for Japan have pointed to a marked slowdown in activity, and a worsening of its trade balance. The BoJ move has been taken in an attempt to stimulate the economy and force its exports up by driving the value of the Yen down.

Meanwhile, markets ignore the latest statistical releases as being lagging and historic, taken before the actions of the triumvirate of the world’s dominant central banks.

In China, manufacturing PMI data has now shown a decrease in activity for 11 straight months.

Economic releases were somewhat mixed in Europe. The PMI for manufacturing and services across the Eurozone fell once more, to stand at 45.9 in September. However, the trade surplus grew in July and wages are rising. These last numbers were taken before the summer period that has seen German industrial activity slide, and the world economy decline. It’s likely that slowing world demand will damage export numbers for the region.

In the UK, recession is biting into government finances hard. August’s budget deficit was the largest on record as spending on welfare ballooned and tax revenue shrank.

In the United States, the housing market continues to respond to stimulus. Housing starts rose by 2.2% in August from July, and sales of previously owned homes rocketed by 7.8%. Overall, sales were 9.3% higher than the same period last year.

With central bank stimulus growing, and the winter period drawing close, it might be expected that oil prices would rise again. However, after touching $100 per barrel last week, crude futures retreated to $93. The fall has been attributed to a lack of conviction that central bank action will have a lasting impact and a rise in supplies as Middle East concerns ebb. However, gold has risen to 6 month highs as the QE measures taken globally seem likely to stoke pent up inflation.

The Dow Jones Industrial Index fell by just 14 points to 13579.47 this week, while the S&P 500 sagged by 5 points to 1460.15. The Nasdaq put on 6 points to end the week at 2861.64. In Europe the FTSE shed 63 points to close on 21 September at 5852.62.

Trading View
The BoJ’s move is clearly part of a concerted and pre-arranged global effort to stimulate the economy. However, domestic demand remains subdued. Massive boosting of money supply by QER, and the relaxing of monetary policy, would be expected to devalue a currency. However, when all central banks are taking similar action, surely devaluation will remain a pipe dream – a new state of multi-devalued currencies will exist and equilibrium remain at a lower level.

I expect that the overall idea is to excite the housing markets, and promote further building (as seen in the US). If house prices can recover, then this will generate a healthier sentiment among consumers and promote economic growth. The problem is, we’re seeing a recovering housing market in the US but with no follow through to the wider economy and job creation.

I have to question if the world’s governments are simply putting off the inevitable and moving us more slowly and more painfully to another, even deeper and harmful, financial crisis, when the world realises the extent of the new debt build-up coupled with pent up inflation.

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