The blog was speaking at 2 major financial conferences on Wednesday and Thursday last week. This provided the perfect opportunity to understand the professionals’ view of recent market events. The key conclusions were:
- All felt that the Federal Reserve was planning to end its stimulus
- They did not believe its later statements that ‘nothing had changed’
- Most thought its communications on the issue were very confusing
Thus Fed Chairman’s Bernanke’s press conference on 19 June was one of those moments that has an enormous impact on market sentiment. And reading the transcript of the Question & Answer, it is obvious why. The key moment was as follows:
“CHAIRMAN BERNANKE. But we’re hopeful, as you can see from the individual projections—and again, these are individual projections, not an official forecast of the Committee—we’ll be obviously very interested to see if the economy does pick up a bit and continue to reduce unemployment, as we anticipate. I think one thing that’s very important for me to say is that, if you draw the conclusion that I’ve just said, that our policies—that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion because our purchases are tied to what happens in the economy. And if the Federal Reserve makes the same error and we overestimate what’s happening, then our policies will adjust to that. We are not—we have no deterministic or fixed plan. Rather, our policies are going to depend on this scenario coming true. If it doesn’t come true, we’ll adjust our policies to that.”
Finance professionals read this statement and took one clear message from it. This was that the Fed now wants to stop its liquidity programme as soon as it can. Therefore, the party is over for financial markets because:
- The Fed has supported short-term interest rates for the past 5 years
- The market has therefore lost its price discovery role in this period
- All major assets around the world are priced in relation to US rates
- So nobody can now know what will happen as the Fed withdraws
Of course, the Fed may be right that the US economy is now improving, and that the global economy is in an upturn. It may also be right that current volatility will just be short-term, whilst markets adjust to the new policy.
But markets hate uncertainty. Equally, muddled communication usually means the strategy is also unclear. Until 19 June, the professionals believed the Fed would always support asset prices. Since then, they no longer have this certainty. And they suspect that the Fed also doesn’t know what it will do next.
The chart shows latest benchmark price movements since January and ICIS pricing comments are below:
PTA China, red line, down 11%. “Buying sentiment weakened following the volatility of China’s equity markets”
Naphtha Europe, black, down 11%. “Stock levels have increased from the previous week, while prices are at an eight-week low”
Benzene NWE, green, down 9%. “Losses reflect continued weakness in both the US and Asian markets moving into July, and the gloomy outlook was supported by fears of an emerging credit crunch in China and the expectation that the US Federal Reserve will scale back its stimulus programme”
Brent crude oil, blue, down 9%
HDPE USA export, yellow, up 8%. “Traders waiting on the sidelines for lower prices”
S&P 500 stock market index, up 10%
US$: yen, orange, up 13%