Onto Jackson Hole amp Beyond

Key upcoming events in indices, FX and commodities:

• August 31: Federal Reserve Chairman Ben Bernanke’s speech to the Kansas City Fed’s the Jackson Hole Symposium on Friday
• September 6: ECB decision: there’s a 20% possibility of reducing the refinancing rate to 0.50%
• September 7: US August jobs report: the key in influencing September’s FOMC decision
• September 12: German Constitutional Court Decision on the European Stability Mechanism and EU Fiscal Compact
• September 13: FOMC decision: will likely pave the way for an October QE3 in the event of sub-100K non-farm payrolls

Throughout this summer, we maintained that equities will see none of the declines of July-August 2011. If anything, we anticipated a neutral to positive display by G7 equities.

As we head into a busy schedule of market and central bank events, it is important to put a few things into perspective.

Last week’s broad jump in equities and risk currencies resulted from a single phrase in the minutes of the July 31/August 1 FOMC meeting, stating: “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Markets interpreted ‘fairly soon’ as such that the Fed will announce QE3 at its September 13 meeting.  Aside from it being a typical knee-jerk reaction of ‘act now, ask questions later’, there are three reasons why the Fed may not announce QE3 this month:

1) Announcing QE3 now would further boost already rallying oil prices (and grains) at a time when the G7 is pressing the International Energy Agency to ask countries to release oil reserves to offset rising prices. The G7 issued a rare statement earlier this week demanding the IEA to increase supplies and stabilise oil prices.  From a US perspective, average gasoline prices are up 15% from their July lows, hitting a four-month high of $3.80 per gallon.  And this is at a time when US consumer confidence dipped to nine-month lows in August.

2) The latest US data on jobs, retail sales, services ISM and Philly Fed presented no real urgency for the Fed to force out QE3 in this month’s Jackson Hole conference. If, on the other hand, the data were poor and the Fed showed reluctance to QE3, then this would prove negative for equities. But the facts cannot be ignored and the data reduces the urgency for the Fed to act in September.

3) Another reason is related to conserving firepower. The Fed may prefer to act at its October meeting, when pre-election market volatility is expected to escalate, especially in the event of a close race presenting the argument that ‘uncertainty equals volatility’. And not to mention, volatility emerging from the eurozone.  See our take on the ECB below.

All of this suggests that the source of the next leg down in equities, energy and risk currencies may emerge from the eurozone (most likely) or China (less likely for now).

On the euro front

Eurozone sources told Market News International that the ECB ‘still has some thorny operational details to work out before it can finalise its widely anticipated plan to relaunch purchases of sovereign debt.’

Yet, there are conflictive reports regarding the timing of any ECB action.

ECB Executive Board member Asmussen asserted on Monday that the ECB would announce details of a new bond-buying programme on September 6, following the ECB’s monthly monetary policy meeting.

That contradicted recent press reports which said that the ECB would wait until after the German high court has ruled September 12 on whether to suspend approval of the new bailout fund, the European Stability Mechanism.

Just as Ben Bernanke has shown skill in supporting markets with keeping the door open for QE3, so has Mario Draghi maintained the euro and eurozone bourses supported with his intention to do whatever it takes to save the eurozone.

Owing to stable market conditions, it is unlikely that both the ECB and Fed will act simultaneously in the same week. Thus, most likely, we could see a preliminary plan announced from the ECB taking a closer step towards bond purchases, rather than actual implementation of a new programme. With peripheral bond yields down 12% to 15% off their July highs, the ECB can afford to think up its plan for another month, while keeping the markets with its ‘rhetorical policy’.

For EUR/USD, the risk of a surprise remains to the upside—possibly of any aggressive action from the ECB. But due to the lack of bad news from eurozone, the ECB also lacks the urgency to act—despite Draghi keeping his hand on the policy trigger. Technically, EUR/USD remains confined below its 100-DMA and 55-DMA of 1.2595 and 1.2395 respectively.  Fresh bids are expected to re-emerge near 1.2490s for a retest of the July top near 1.2660s.

Neither the VIX nor equities themselves show any looming sign of a sell off in risk appetite exceeding 7%-8%. If anything, the S&P 500 carries the potential to retest the latest 2012 highs of 1426 , while the Dow 30 eyes its 2012 highs of 13330.  On the downside, the S&P 500 remains supported at 1394, with a 13-week trendline support. For the Dow 30, this 13-week trendline stands at 12,960. For the FTSE 100 and the DAX 30, the key support levels stand at 5,633 and 6,710 respectively.