Wednesday Morning Cheat Sheet: 3 Stories Moving Markets
Markets were mixed in Asia on Wednesday. Japan’s Nikkei climbed 1.22 percent as the yen weakened slightly to trade at 97.9150 to the dollar. The Hang Seng fell 0.47 percent, while the S&P/ASX 200 climbed 1.08 percent.
Mr. Market suffered a red day in Europe as major markets declined in mid-day trading. Germany’s DAX was off 1.63 percent, London’s FTSE 100 was off 0.72 percent, and the STOXX 50 index was off 1.29 percent.
U.S. futures at 8:00 a.m.: DJIA: -0.64%, S&P 500: -0.70%, NASDAQ: -0.74%.
Here are three stories to keep an eye on:
1) Reconsidering an Exit Strategy: “When we last considered our exit strategy, in June 2011, the U.S. had seen two years of economic recovery, growth averaged just 2.2 percent, and the unemployment rate had fallen from its peak of 10 percent to 9.1 percent,” said Charles Plosser, president and CEO of the Federal Reserve Bank of Philadelphia, in a speech this week. “Since then, economic conditions have improved, but the pace has been uneven. Overall growth since June 2011 has remained modest, averaging just 2 percent at an annual rate, but the unemployment rate has fallen to 7.6 percent.”
Plosser foresees the day when the Fed will be forced to end quantitative easing, unwind its balance sheet — which has now expanded to more than $3 trillion — and return to a framework in which the federal funds rate is the primary instrument of monetary policy. To put it lightly, this will be tricky. A common criticism of Ben Bernanke’s unconventional policy is the risk involved in this transition. Plosser outlines a means to normalize monetary policy in his speech, but recognizes that the transition will be delicate.
2) Will Gold Break the Banks? Bloomberg reports that gold’s recent slide to below $1,400 per ounce has wiped out as much as $560 billion from the value of central bank reserves. All told, central banks own about 19 percent of all gold mined. Through April of this year, gold funds have suffered outflows of more than $11 billion, while equity funds have enjoyed inflows of more than $21 billion.
“There’s a perception that risk has been lessened, and with that, investors are looking for assets that either generate income or have growth potential, neither of which gold has,” Anthony Valeri, a market strategist with LPL Financial Corp, told Bloomberg. “We’ve seen a grab for yield, and without a yield, gold has been left out.”
Many people are claiming that the recent sharp correction in gold signals the strength of the economy. However, the International Monetary Fund reminded everyone that the global economy is sluggish at best. The organization lowered its estimate for global growth to 3.3 percent, which is only slightly more than last year and down from the 3.5 percent estimate made earlier this year. The U.S. is expected to expand only 1.9 percent this year.
3) European Car Sales Continue to Decline: New passenger car registrations — a proxy for the demand of new cards — declined for the 18th consecutive month in March in the European Union (EU27, excluding Malta). For the month, new car registrations declined 10.2 percent on the year to 1,307107 units, as reported by the European Automobile Manufacturers’ Association.
Over the course of the first quarter, new car registrations declined 9.8 percent on the year to 2,989,486 units.
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