Markets Overview: (Source: Bloomberg, FT, Reuters, DJ Newswires)

  UK 100 called to open +45pts at 6175, off their worst levels having tested the highs of May 2011 after a another bout of painful indigestion/heartburn regarding the US Federal Reserve’s view that current momentum in US macro data ‘could’ (much emphasis needed – all dependent on improving data) allow QE3 tapering by year-end and withdrawal of the stimulus drip next year.

The negative reaction highlighted market addiction to stimulus and cheap money and less belief the US economy can stand on its own two feet – a scoff at the Fed’s slightly more positive growth projections. If anything the acceleration in sell-off after strong US data saw the return of the good data is bad/bad data is good relationship in terms of markets wanting to see stimulus stay round for longer and likely makes markets even more sensitive/volatile to all US macro data.

Expectations of stimulus withdrawal have strengthened the USD and brought forward expectations of interest rate rises (closer than the 2015 the fed forecasts) from their all-time lows which scared some who believe this could hamper the housing market and consumer sentiment recovery. I still reckon Fed managing expectations wanting to hold markets back from getting too excited and fully expecting to have to push back its timetable.

Despite the stimulus and low rates being designed to help the US economy, withdrawal is potentially seeing a big unwind of the carry trade where money borrowed cheaply was deployed in higher yielding emerging markets which have benefited markedly, but now seeing their own equities, FX and bonds suffer as better, safer returns have become available back in the US (bonds sold off and yields risen sharply) and developed markets.

As much as the Fed is a concern, China still a worry (cash crunch, weak growth) as is the Eurozone with peripheral bond yields there also rising (in some cases worryingly) on the prospect of life after QE3 and central bank stimulus having run its course. Note Eurozone Finance ministers agreed on guidelines of how bailout funds (€60bn) could be used to directly capitalise the banks in region’s weakest economies. Greece back in focus on coalition stability and reports IMF could suspend bailout payments.

Asian markets see Japan’s Nikkei off lows and in the green, helped by weaker JPY (on stronger USD) and Japan officials talking up their economy’s future. Hong Kong & Australia held back (off worst levels) by China despite reports of the PBOC injecting some cash into the system, helping banks.

In focus today, will be the continued fallout/coming to terms with the Fed’s plans and adjusted market sentiment as we move into the weekend with a lack of meaningful macro data on the agenda.

UK 100 found some support after a test of May 2011 highs of 6140. Potential for prior lows 6200 to become resistance of the grand plan is for the index to retrace all the way to the 4yr trendline of rising support around 6050 before resuming its uptrend.

In FX, GBP/USD recovered some of its weakness bouncing from just above 1.54 to regain 1.55. Still in downtrend from Jun 4-month highs of 1.575. Still driven by USD strength on Fed’s update on QE3. EUR/USD rebounded from 1.316 to regain 1.325, but again also in downtrend from HJUn highs of 1.342. Still a fight between relative strength of US and Europe. USD/JPY rallied to 98.

 Gold tested $1270 yesterday (below May lows of $1350 and April lows of $1322) to levels not seen since almost 3 years ago. In decline since Oct 2012 highs of $1800 and after a revisit of a $1200 handle, the yellow metal could well revisit $1150 if $1300 now proves a hurdle.

Pressure from Fed Chairman Bernanke’s signal of potential QE3 tapering this year and possible end to the programme next year (data dependent) has seen the USD surge, rendering dollar-denominated commodities like Gold more expensive. Less concerns of global meltdown thanks to central banks’ willingness to step in if necessary has also reduced need for the traditional safehaven while an absence of elevated inflation, despite unprecedented central bank money printing and intervention, has dented the requirement for Gold as a hedge. ETF redemptions and speculation also appear to be hurting it. Lastly, in a world focused on the short-term and where low returns can be a good showing, holding something yielding nada can be difficult to warrant unless in it for the very long-term.

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Overnight Macro Data: (Source: Reuters/DJ Newswires)

• China               MNI Flash Business sentiment            Not out yet

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