Equity Markets Await News from the Fed After Implication of December Tapering

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Equity Markets Await News from the Fed After Implication of December Tapering

Equity Markets Await News from the Fed After Implication of December Tapering


George Osborne must be feeling pretty relaxed ahead of the Autumn Statement, which will land in our laps this week.

Britain's official forecaster, the Office for Budget Responsibility, is expected to revise its forecast for growth in the economy when it publishes its latest verdict and is also likely to lower its borrowing projections.

In theory, this should give the Chancellor the extra breathing space he needs to offer a few pre-election giveaways, yet economists I know say he's better off sticking to austerity for now.

The UK's deficit remains high compared with many of its peers, and risks remain to the recovery.

Having said that, Osborne will undoubtedly spend a few minutes taking credit for the growth we are now seeing in the UK.

Another Housing Bubble in the UK?

His critics argue that we are seeing the wrong kind of growth, with schemes like Help to Buy fuelling house price rises over recent months and threatening another bubble.

The Bank of England certainly seems to be concerned and made a surprise intervention to cool the housing scheme.

Governor Mark Carney said the Funding for Lending scheme, which allows lenders to borrow at low rates on condition they lend, will no longer be allowed for mortgage loans from February next year.

The message is clear: Help to Buy is providing more than enough stimulus to the housing market and it's time to take the foot off the gas.

If growth in the wider economy continues to steadily pick up, so too does the likelihood of the Bank of England raising interests rates before 2016, the timeframe originally implied by its forecasts.

Over in the Eurozone, although the German economy is making steady progress, France is in danger of slipping back into recession in the fourth quarter following a 0.1% fall in GDP during the third.

There is also increasing speculation that the European Central Bank is willing to impose negative deposit rates on banks, essentially charging them to deposit money in a bid to encourage them to lend more.

No-one ever said economics was straightforward!

Will the Fed Spook Equities with Early Tapering?

When it comes to the outlook for equity markets, all eyes are on the Federal Reserve's quantitative easing programme.

Markets had a 'taper tantrum' after the last set of Fed minutes, because it was inferred that tapering could start in December.

This is unlikely according to my sources because it would be foolish to do anything before the debt ceiling talks are resolved and Janet Yellen has got her feet warm under Ben Bernanke's desk.

The market expects tapering to start early next year so it is better not to spook equities and do it before this.

There is likely to be enough volatility when it starts anyway, with emerging markets hit the hardest as the remaining hot money finally leaves.

Gold is likely to be a victim too.

I am not confident on the price of the precious metal at all next year.

Inflation expectations are falling and some think that interest rates will also rise next year.

Gold, as a non-yielding asset that costs to store, will suffer from this.

In fact, it looks pretty negative for most commodities going into the New Year, in my mind.

Of course, the exception is crude oil; I really don't see the price falling much at all.

Until next time...




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