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Today's Markets - June 20, 12 (4 comments a day)

Pretty much as expected the G20 meeting has ended on a rather disappointing note neither spelling out any plans how to deal with a worsening European financial crisis especially what the still rising but already unsustainable Spanish government bond yields concerns nor how to restart global growth altogether.

Today's Markets - June 20, 12 (4 comments a day)
09:00 A.M

However the disappointment is expected to be short lived and should be brushed aside by markets fairly quickly as today Fed chief Bernanke and the FOMC are taking centre stage with expectations once again high that Fed will finally do something to stimulate increasingly sluggish growth.

Basically the Fed will have to deliver something today, not necessarily an outright announcement that they will be starting QE3 or implementing any stimulus measure ‘straightaway’ but at least that they are a step closer to act and to support the struggling economy.

If there is no change in the wording of the FOMC statement at all compared to the last time or if during the following press conference with Fed chief Bernanke no hints are being given that the Fed is any closer to act than it will be very hard to keep the current rally in stock markets around the world going.

Furthermore worries will be surfacing that once the Fed finally acts that it might just be too late to stem off a severe slowdown of the economy or even another recession altogether.

Markus Huber - Head of German HNW Trading - ETX Capital

9:30 A.M

ETX Capital calls UK’s FTSE 100 to open 15 points lower, Germany’s DAX off 10 points and France’s CAC-40 down 5 points.
Stocks are set to pause for breath after Tuesday’s bumper rally across the region, underpinned by hopes that central banks will step in to spur economic growth and Greek politicians finally working together to form a coalition government. A firmer session in Asia overnight lends a degree of support, but caution persists ahead of UK jobs data, BOE meeting minutes and the Fed’s policy meeting later in the day.

Ishaq Siddiqi - Market Strategist, ETX Capital

Hopes for further stimulus measures by the Fed have helped to lift spirits, albeit volumes are relatively thin and volatility remains high as euro zone debt tensions persist. The G-20 meeting has come to an end and was regarded by most as a non-event, yielding little but the same rhetoric heard in recent months that the euro zone must do more to help itself.

The highly dovish BOE’s meeting minutes for June are to thank for some of early upside in Europe, showing four members of the MPC voted for more asset purchases. The minutes have paved the way for more QE in July, with GBP50 billion likely to be delivered given the current weak economic conditions in the UK and ongoing deterioration of the global economy by the escalating euro zone crisis.

Further slowdown in economic growth would prompt calls for more QE in the months ahead, so the amount of stimulus is likely to rise if the BOE continues to hold fire in the near term. Indeed, UK unemployment data painted a sluggish picture of the country’s labour market, and this is unlikely to change anytime soon.

Together with the BOE fuelling QE hopes, Greece is acting to stabilize its political environment and easing Spanish bond yields offer a level of comfort to market participants. Germany’s 2-year debt auction was decent with strong demand. The auction however does demonstrate that investors are still flocking to quality, which will continue in the run up the Eurogroup meeting at the end of the month, so expect more volatility across all asset classes.

It’s now over to the Fed’s rate setting announcement after the European market close. If the Fed’s tone at this policy meeting is more dovish than expected – markets will turn up the volume on calls for additional stimulus. Expectations that the Fed could deliver QE3 today have gained momentum in recent days, but judging by economic data [which has not been weak enough i.e. this week’s housing data] it seems unlikely the Fed will pump more liquidity just yet.

The likely option here could be the extension of “Operation Twist” or even the “lower rates for exceptional period” mantra again- the latter of which would disappoint ‘stimulus-expecting’ markets. Bernanke’s press conference following the rate announcement will be the key for further direction on the Fed’s outlook. Ahead of the US session, ETX Capital calls US markets broadly flat, calling the DJIA up just 5 points and the S&P flat.

Ishaq Siddiqi - Market Strategist, ETX Capital

17:30 P.M

Heading into the European close, stock markets are set to finish the day in a positive mood but price action has been relatively subdued in afternoon trade. Indeed, volumes are low as clients have refrained from building positions ahead of the Fed’s policy meeting and monthly due after the European market close. Stocks are calmer, as are sovereign bond yields – easing off dangerous levels. Earlier, the dovish tone of BOE minutes indicating QE could be round the corner, boosted these stimulus hopes.

As such, the dollar is consolidating, holding tight ahead of the FOMC decision. Recent deterioration in US economic data together with tensions in the euro zone and slowdown in global growth puts the Fed in a position to deliver stimulus The big IF however is what sort of stimulus the central bank will respond with, if any.

In the event of further QE3 by the Fed, the US dollar will brace itself for rough ride against riskier rivals like the euro, while cyclical stocks such as financials and miners will respond favourably across global equity markets. The pressure on will soon fall on the ECB to respond to the escalating euro crisis before Spain becomes the next victim. Again, the big IF here is what form of additional easing will the ECB employ to arrest the spread of contagion? Buying peripheral bonds or a third round of LTRO? Thursday’s session will see the release of euro zone flash PMI surveys, which have in recent months rattled confidence in a series of weaker-than-expected releases. Composite PMI index hit new three-year lows in May, and expectations are for it to fall further.

Moreover, the flash PMI’s have depicted a shaky picture of the German economy in recent months, a sign that the EMU crisis is taking its toll on the largest economy in the euro zone. As such, the focus will be on the German PMI’s which are released before the euro zone figures. Other than data, Spain is back testing the markets for the second time this week, this time attempting to sell around EUR 1BILLION TO EUR 2 BILLION of government bonds. After Tuesday’s relatively decent T-bills auction, expectations here are for another good auction for Spain, but the country will without a doubt continue to pay an exceptionally high yield.

Meanwhile, euro friendly developments on the political situation in Greece also offered some respite, with news that a deal on a coalition government in Greece seems to have been reached. This has offered some hopes that Greece has the political will to finally sort out its mess, and if headlines this week continue to suggest greater stability in Greece, markets are likely to end the week on a firmer footing.

Ishaq Siddiqi - Market Strategist, ETX Capital


Mercredi 20 Juin 2012

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