The world’s media rushed to the City of London yesterday afternoon. On Eastcheap, just around the corner from the Bank of England, a globally significant story was unfolding live.
The new ‘walkie talkie’ skyscraper is under construction there. It has curved glass walls, which focus the sun’s light into an intense beam. On Monday, the beam of light was strong enough to warp the plastic on cars parked outside. By Tuesday afternoon, a troop of reporters were scrambled to cover the story of the melted wing mirror.
August is traditionally a quiet month for news and for the markets. In the headlines, you read about melted wing mirrors instead of big summit meetings and elections. The dog days of summer are coming to an end now though. And September looks like a tempest in the brewing.
But the thing is, the markets seem pretty confident they’re happy with what’s coming. And that’s what could make for an interesting September. Remember, it’s not what the markets do know that causes the big moves. It’s what they think they know, that turns out to be wrong that really upsets them.
There’s so much going on!
• We should finally find out when the Fed will taper on 18 September. According to the influential US economist Jim Rickards, “The Fed will taper in September, or never”. The markets have been guided towards the September press conference. And anyway, with Japan in easing mode and so much money flooding out of emerging markets back to the US, now would be a good time to pull at the reins.
You don’t need me to tell you that a surprise ‘no taper’ may cause a bit of commotion. It could reignite the quantitative easing (QE) to infinity debate. That outcome could be very good for gold and gold miners. Rickards is expecting the markets to be surprised, and I wouldn’t bet against him. Who knows? We’ll have to wait and see.
• Tomorrow we’ll hear more from the European Central Bank and the Bank of England. That’s important because both of these central banks have been testing some new ideas lately.
Come midday on these special Thursdays, it used to be that we keenly awaited just one bit of data: the central bank’s key lending rate. But nowadays, we await updates on QE or any other monetary trick the central banks have come up with. On top of that, we also now look for any nuance on ‘forward guidance’; that is, how long the current batch of central-bank manipulations are expected to last.
The markets are pretty confident that there’ll be no change here. That’s the most likely outcome. But of course, that means that any surprise could really rock the markets.
• Friday sees the release of some important employment figures out of the US. The non-farm payrolls release is the most important bit of data to be released before the Fed’s monetary policy meeting.
Yes, it’s back to that tapering story. Basically, Bernanke has linked the removal of QE to the employment numbers. Yujiro Goto, a senior currency strategist at Nomura says, “Should we continue to see nonfarm payrolls increase by about 150,000 to 160,000, the likelihood of a September tapering of Fed easing will remain intact.”
On the other hand, if the figures are bad, it’ll be back to the old ‘bad news is good news’ for the markets. Poor employment figures would mean more Fed stimulus.
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• Next week, there’s an important meeting of Europe’s top banking brass. EU finance ministers will meet a clique of central bankers and commercial bankers in Vilnius to discuss a banking union. This is crucial stuff for the survival of the euro. There could be bad news for eurozone countries’ sovreignty here, or bad news for the entire euro project. We await an outcome with bated breath.
• On 16 September, Portugal meets with the EU and the International Monetary Fund (IMF) to discuss its overdraft position. The Portuguese have seen the Troika’s softening stance towards Greece, so surely they will also demand some leeway. I suspect Portugal will drive a hard bargain. After all, nobody wants to see a flare-up just now; we’ve got German elections the following week.
• 22 September sees the German Federal elections, the most important election day in Europe. Merkel has this one in the bag. The only thing in doubt seems to be her coalition partners.
But make no mistake, there are some big issues to be debated here – and any new partner may be driving a hard bargain. According to a poll by YouGov, Germans are looking for some big changes when it comes to Europe:
- 55% of Germans believe Germany should keep the euro, but that membership should be restricted to a smaller group of countries.
- 32% favour returning to the deutschmark.
- 42% say the euro is threatening the European project.
- 57% say the government should not have a mandate to forgive debt from troubled countries.
We’ve seen how Ukip forced some big changes to our own coalition’s policies, moving the ‘centre ground’ in their direction, and that was just local elections. So the German elections are not as cut and dried as they seem.
There you have it – summer is ending with a bang. There’ll surely be some big surprises somewhere in that lot. Market volatility could take us either way, or probably both. The key is to hold on tight for what’s bound to be a bumpy ride.