Friday could prove a very messy end to rather a messy week for markets.
We've got what's arguably the single most important economic data release in the world coming out: the US non-farm payrolls figures. This will give us a view of how the US employment picture looks.
Why does this matter so much? In short, the more jobs the US economy creates, the closer the Federal Reserve comes to turning the money taps off.
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No one knows for sure what'll happen when it does. But only the most deluded optimist could imagine that there won't be any consequences.
And the chances are that most people will sell first then ask questions later
The sheer meaninglessness of the world's most important economic report
Let's make one thing clear upfront: the US jobless data out on Friday means very little on a long-term basis.
The figure we get will show how many jobs were added to (or lost from) US non-farm payrolls over the month of May. Because farm work these days only accounts for a tiny proportion of jobs in the US, this is basically the official employment figure for the whole of America. We also get the official unemployment rate.
These figures are revised substantially, on a frequent basis, and over a long period of time. So the best way to describe tomorrow's figures is as a very rough guess as to how many people are currently in work in the US.
The institute that collects the data the Bureau of Labor Statistics - doesn't pretend otherwise. It reckons the margin of error to be 90,000. In other words, the figure could quite reasonably be a good 90,000 jobs out either side of the estimate.
Yet, Wall Street analysts on average, expect the number to come in at or very close to the 170,000 mark, according to Reuters, with the unemployment rate remaining at 7.5%.
And, as Lee Adler notes on the Wall Street Examiner blog, if the actual number misses or beats Wall Street estimates by roughly 20,000 or more, you can guarantee a spurt of fireworks in the market. (You probably don't want to have any spread betting trades open around this time, unless you are really confident that you know what you're doing).
Seriously, if you're at all interested in how markets work, get a chart up and watch any stock market or currency pair you like at around 1:30pm tomorrow. That's when the jobs data comes out. If nothing else, watching the charts pinball about as traders digest an essentially random number, will cure you of any illusions you may harbour that markets are efficient.
Mr Market has changed his mind
Now, last month, the jobs data beat market expectations. Everyone cheered. The Japanese yen weakened to below 100 to the dollar. Stock markets leaped.
So we'll be hoping for a good number again this time? Ah, not so fast.
You see, last time around, markets still believed that the Federal Reserve was bluffing about pulling back on quantitative easing (QE). So it was the best of all worlds.
Good economic data meant things were improving so buy the US dollar.But it wasn't so good that the Fed would stop printing money. So you can keep buying stocks. In the jargon of the financial world, it was a risk-on' world.
In just a short space of time, things have changed. Fed chief Ben Bernanke's recent speech, and minutes from the Fed's latest meeting, has convinced investors that the end of QE could be just around the corner. The better the economic data, the faster the end will come.
So if the employment data improves a lot tomorrow, investors will start to panic. Sure, more people will have jobs. But who wants that if it means the Fed will turn off the money-printing feed that's keeping stocks afloat and bond yields down? So while the US dollar would probably rise on a good' number (less QE means a stronger dollar), stocks will likely fall.
But even a nasty employment figure might not save stocks. The average investor let's call him Mr Market - now believes that it's just a matter of time before QE ends. Worse still, he's had time to worry about what happens when it does. And he's had time to lose a little bit of faith in the Fed.
Last month he was thinking: "Don't fight the Fed. The trend is your friend. Money-printing trumps everything else."
This month he's thinking: "Can the Fed really stop a market panic? Is that even its job? Just how much pain will it allow shareholders to feel before it takes action? And can it really stand against the tide of selling if a bond market panic kicks off? After all, the Japanese central bank has suffered a fair few wobbles in its bond market. For that matter, what even happens if bond markets crash? How much control do these guys really have?"
So even if the employment data is bad enough to stay the Fed's hand for a little, nothing will have fundamentally changed. QE is still going to be withdrawn eventually. And rather than feeling confident, Mr Market will feel confused.
What it means for your money
Remember what Benjamin Graham, the father of value investing, said about Mr Market. He characterised him as a rather up-and-down sort of person, someone who'd buy stocks off you at any price one day, then be desperate to sell them to you at any price - the next.
With any luck, it looks as though you'll be getting the chance to buy stocks a lot cheaper in the near future. So if there are any you've had your eye on, just make sure you know what you want to buy and where, and have the cash ready.
On a wider level, fear of an end to QE could spark a really vicious sell-off. Or markets might regain their poise and shrug it off. But in any case, I'd continue drip-feeding money into our favoured markets Japan and Italy even although they might drop further.
I'd still avoid the US market as a whole, although individual sectors are more interesting. We look at some promising energy-related sectors in the next issue of MoneyWeek magazine, out tomorrow. If you're not already a subscriber, subscribe to MoneyWeek magazine.
Also, if you're interested in trading, I suspect my colleague John Burford is right in saying that the Dow Jones has topped out, at least in the short-term. Have a read of his MoneyWeek Trader emails for more ideas on how to play it.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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