FOMC Will Put Safe Havens Back In Spotlight. By Nicholas Hastings
A cautious U.S. Federal Reserve should lower global growth expectations and send investors back into safe havens, such as the dollar.
Although the U.S. central bank may signal an end to recent quantitative easing, its assessment of the U.S. economy should prove more dovish than the market anticipates.
This should correct some of the euphoria that spread through global markets after last Friday's better-than-expected U.S. non-farm payrolls and inject more realism into global markets.
There are plenty of reasons to expect the latest Federal Open Market Committee meeting to take a more sober view.
Just look on the international side.
Chinese data this week have proved to be a little on the soft side - suggesting that third-quarter growth may moderate. Although the country is nervous about taking its foot off the monetary accelerator, the People's Bank of China is also faced with the risk of an asset bubble as liquidity continues to push equity prices sharply higher.
A reminder that financial risks also remain in the wider global economy came with a warning from the President of the Federal Association of German Banks, Andreas Schmitz, that a credit crunch remains "a real danger."
The fact that the Bank of England felt it appropriate to expand its quantitative easing program last week, despite evidence of improvement in the U.K. economy, added to the impression that the global recovery cannot be taken for granted at this stage.
Another key element influencing global growth expectations is the receding fears over inflation.
Despite its strong performance back in June, the price of gold has been receding steadily over the last seven days, reflecting the feeling that global price pressures are on the way down.
This is certainly the signal being flashed by the Baltic Dry Index, a measure of freight costs that has fallen to a three-month low.
But it is probably the uncertain outlook for the U.S. economy itself that should ensure the Fed tames market optimism.
On Monday Laura Tyson, President Obama's economic advisor, summed up the problem: "The expansion that you'll see in the second half of the year in the U.S. economy is primarily driven by two things: the stimulus and inventory adjustments...once the government steps back, we're not sure that the private sector is going to be enough to pick up the slack."
In other words, as with China, the recovery we saw in second quarter may well stall in the third.
If that is the case, investor confidence in riskier asset markets could retreat again - leaving the dollar and other safe-haven currencies back in demand.
Early Wednesday in Europe, uncertainty over what the Fed will say was driving risk appetite lower again with equity markets across the globe in retreat. The Nikkei followed the Dow Jones Industrial Average's 1.0% fall with its own 1.4% decline, while the Shanghai Composite was down 4.1%.
By around 0710 GMT, the dollar had fallen to Y95.36 from Y95.93 late Tuesday in New York, according to EBS. The euro was down at $1.4120 from $1.4154 and at Y134.72 from Y135.74.
Although the U.S. central bank may signal an end to recent quantitative easing, its assessment of the U.S. economy should prove more dovish than the market anticipates.
This should correct some of the euphoria that spread through global markets after last Friday's better-than-expected U.S. non-farm payrolls and inject more realism into global markets.
There are plenty of reasons to expect the latest Federal Open Market Committee meeting to take a more sober view.
Just look on the international side.
Chinese data this week have proved to be a little on the soft side - suggesting that third-quarter growth may moderate. Although the country is nervous about taking its foot off the monetary accelerator, the People's Bank of China is also faced with the risk of an asset bubble as liquidity continues to push equity prices sharply higher.
A reminder that financial risks also remain in the wider global economy came with a warning from the President of the Federal Association of German Banks, Andreas Schmitz, that a credit crunch remains "a real danger."
The fact that the Bank of England felt it appropriate to expand its quantitative easing program last week, despite evidence of improvement in the U.K. economy, added to the impression that the global recovery cannot be taken for granted at this stage.
Another key element influencing global growth expectations is the receding fears over inflation.
Despite its strong performance back in June, the price of gold has been receding steadily over the last seven days, reflecting the feeling that global price pressures are on the way down.
This is certainly the signal being flashed by the Baltic Dry Index, a measure of freight costs that has fallen to a three-month low.
But it is probably the uncertain outlook for the U.S. economy itself that should ensure the Fed tames market optimism.
On Monday Laura Tyson, President Obama's economic advisor, summed up the problem: "The expansion that you'll see in the second half of the year in the U.S. economy is primarily driven by two things: the stimulus and inventory adjustments...once the government steps back, we're not sure that the private sector is going to be enough to pick up the slack."
In other words, as with China, the recovery we saw in second quarter may well stall in the third.
If that is the case, investor confidence in riskier asset markets could retreat again - leaving the dollar and other safe-haven currencies back in demand.
Early Wednesday in Europe, uncertainty over what the Fed will say was driving risk appetite lower again with equity markets across the globe in retreat. The Nikkei followed the Dow Jones Industrial Average's 1.0% fall with its own 1.4% decline, while the Shanghai Composite was down 4.1%.
By around 0710 GMT, the dollar had fallen to Y95.36 from Y95.93 late Tuesday in New York, according to EBS. The euro was down at $1.4120 from $1.4154 and at Y134.72 from Y135.74.
- 12 August |
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