Federal Reserve not in a hurry just yet

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Federal Reserve

This week’s blog was written by Leo de Jong, stepping in for Ben Steinebach. This week, three issues kept the markets on their toes: policy decisions by the US Federal Reserve, European Central Bank (ECB) action and the Alibaba IPO (and a fourth was the Scotland referendum of course). Much as expected, the Fed tapered QE by a further USD 10 billion to USD 15 billion a month.

Another USD 10 billion shaved off its monthly support programme took this to USD 15 billion, in line with market expectations Ben Steinebach Ben Steinebach Head of Investment Strategy

To start off with the US Federal Reserve, another USD 10 billion shaved off its monthly support programme took this to USD 15 billion, in line with market expectations. The Fed said it would discontinue the programme – i.e. stop even these last USD 15 billion – if the economy and labour market keep improving. Importantly, the Fed wants to go easy on any future rate increases and its statement repeated its insistence on a 'considerable time' before any interest rate move, depending on economic developments. In other words: the timing is not in any way a given, although it did hint that interest rates might be raised higher in 2015 and 2016 than had been suggested before. We don’t think that’s such a bad thing. In fact, higher rates would confirm that the US economy is on solid ground and, as long as inflation stays low, future rate increases won’t keep us awake at night.

ECB continues to support the markets

The week’s second key event was the ECB’s first targeted long-term refinancing operation (TLTRO), which will see it lend money to banks for a maximum period of four years. The September and December TLTROs will facilitate bank borrowing of up to some EUR 400 billion, and the ECB said it was looking to lend a total EUR 1,000 billion through its planned set of eight operations. Although the cost of TLTROs is quite favourable when compared with other funding sources, demand from banks might be relatively slow to take off and they could well tap less than the available TLTRO funding. And indeed, total demand lagged expectations by stalling at EUR 83 billion. The TLTROs are part of an extensive package of ECB measures that also includes an asset quality review of banks and an asset purchase programme of asset-backed securities and covered bonds. Taken together, this is turning into an impressive and comprehensive package of measures to support – and continue to support – the markets.

Stock markets gather momentum

On Friday morning, the provisional outcome of the referendum in Scotland was in – a virtually certain No should keep the Scots in the Union. Without a doubt, this is the best scenario for the markets, as they don’t like uncertainty and Scotland breaking away from the United Kingdom would have entailed a lot of uncertainty, on many different fronts. The Scottish No vote gave an extra boost to the markets on Friday. In fact, Amsterdam had an altogether brisk week and shot up to its highest levels in the past twelve months. After moving mostly sideways in the first eight months of the year, the Amsterdam stock market seems to be gradually picking up some speed. Sterling also benefited from the No vote in Scotland, having come under pressure in the weeks leading up to the referendum. Not only did it make up for lost ground, it touched a new all-time high relative to the euro.

Alibaba IPO and outlook

Friday saw Alibaba’s initial public offering, with the Chinese internet company achieving its listing status on the New York Stock Exchange. After announcing a price range of USD 66 to USD 68 per share, Alibaba ended up setting its issue price at USD 68. Alibaba comprises the three leading Chinese online retailing platforms: (1) Taobao Marketplace, China's biggest consumer-to-consumer retail site, comparable to an eBay in the international arena; (2) Tmall, China's biggest online site for branded products offered for sale to consumers by companies; and (3) Juhuasuan, China's most popular online marketplace for collective purchases, where customers are clubbed together to buy products at a discount – a bit like Groupon. These three websites accounted for over 80% of Alibaba’s sales in 2014 and for 84% of China's online shopping industry. Whether or not Alibaba remains an attractive play after the IPO will depend on the price it commands. Trading had yet to start at the time of writing, but this much was clear: the Chinese internet major could have no complaints about investor interest.

Next week won’t bring much in the way of company news and we can’t expect any quarterly results releases until early October. By contrast, macroeconomic data should be plentiful: in the United States we’ll see the release of a range of purchasing managers indices (PMIs) and durable goods orders, as well as the University of Michigan’s latest forecasts for second-quarter economic growth and consumer confidence. The Eurozone and China are also expected to publish PMIs, while Germany will publish its IFO business confidence index.


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