Halloween: More tricks than treats ahead this week?There’ll be more tricks than treats for the sharemarket before Halloween this Friday as everything hangs on just two words.
No, not those.
Wall Street is already edgy so won’t take kindly to any fright. On Wednesday the US Federal Reserve intends removing the money-printing life support system from the market known as quantitative easing or QE3, having been upgraded iPhone-like. The reason for the third version is that the other two, while a boon for bond and sharemarkets as the Fed has been almost giving money away, didn’t seem to help the US economy much.
Fortunately some of that extra money even found its way into our sharemarket.
Japan has a bigger QE still and it’s spilled into AAA-rated Australian government bonds, pulling down yields and indirectly helping the sharemarket as high dividend paying stocks look more appealing.
Bonds might be safe but who wants to invest in something paying little more than 3 per cent, barely keeping up with inflation, for the next 10 years?
Oh yes, the Japanese and almost everybody else whose alternative is a yield of only 1 or 2 per cent.
So for the first half of the week markets are going to be nervous. I’m only guessing but it seems unlikely the Fed will extend QE. And even if it did I’m not sure this would even please the market, at least after about five minutes, because it would be tantamount to saying the US economy is still too frail to stand on its own two feet.
When it isn’t. Its unemployment rate and budget deficit as a proportion of GDP are lower than ours for starters.
In fact the US economy is the world’s bright spot as one of the few going in the right direction. Europe and Japan are going the wrong way as is China even though it’s still the fastest growing.
The trouble is its strength is also a weak point which also helps explain why markets are all over the shop.
The US is going through a shale oil and gas boom that is nothing short of an economic revolution.
This is boosting profits and real household incomes by dragging its energy costs to rock bottom, so far down that the big worry is that inflation running about 1 per cent is a little too low for comfort. The Fed is keen to push it above 2 per cent.
Hmm, it’s a pity we can’t lend it some of ours which is running at an underlying rate of 2.5 per cent.
Anyway low inflation rings alarm bells at the Fed so it won’t be in a hurry to lift interest rates even though they’re uncomfortably low, encouraging more debt which the US hardly needs.
But economic growth beats fiscal rectitude when confidence is brittle.
Which brings me to the two words markets so want to hear that I’m sure will be spoken.
These are that rates will stay low for a “considerable period.” As will ours, for even longer.
This story Administrator ready to work first appeared on Nanjing Night Net.