This is a week for ‘accumulating’ observations about the next move in the markets. There’s a pause following the near-carnage in August. Into that silence step the Greeks. And what have they decided to do?
Nothing. Aside from the re-election of Alexis Tsipras, it’s effectively status quo ante Greece. The Greeks want to stay in the euro and enjoy the benefits of membership. But they don’t want to pay their debts. It is Germany’s problem now.
Really, it is all Europe’s problem, as in the European Union in its current Brussels-led incarnation. You can imagine how history will tell the story: an economic crisis became a social crisis in 2015 when a wave of illegal human migration swept over the walls of southeastern Europe. Politically, Europe was swamped.
The first review of the third Greek bailout has already been pushed back from its 5 October deadline. Greek debt, at €320bn, is small fry in the age of central banks monetising everything. But if Europe can’t coordinate a response and enforce it, it will undermine confidence in the European Central Bank too.
That’s all big-picture though. Short-term, this is confirmation that pretending things are OK is the new normal. For investors serious about selling into strength – or at least not selling into a panic – these are your moments. Choose wisely.
Fed non-action having opposite reaction
The Fed held US rates low to save emerging markets. That’s one way of reading last week’s rate decision by the Federal Open Market Committee. If the Fed were serious about ‘normalisation’ then the conditions in the US job market and economy should have given it room to raise rates, at least for effect.
But it didn’t. And now it may not be able, lest it be accused of political interference in the 2016 US Presidential election. The next meeting isn’t until 27 October. It then meets on 15 and 16 December. A central bank with strong political backing and nominal independence from political influence would do what it wanted when it wanted. But the very existence of the Fed itself is a campaign issue on the right of American politics.
All that puts Fed chairwoman Janet Yellen in a bind. And, not knowing (or perhaps knowing full well) the scale of the risks in China’s economy, Yellen opted to keep rates low. That should have been good news in places like Australia. And the Aussie dollar has rallied off recent lows.
But when markets opened on Monday in Sydney, they fell. Australia’s benchmark index, the ASX/200, fell over 2% by the close of trading. In the scheme of things, Japan, Germany and the UK are far more important for UK investors.
But to the extent the Aussie market tells how the Fed’s policy move is going to be received, the answer is clear: not well.
Category: Market updates