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20 Aug 2013
Brace for impact: markets primed for intense volatility over next six weeks
FXstreet.com (New York) - Many investors have been lulled to sleep with extremely muted trading that has enveloped the markets over the past few weeks. Indeed, this sense of tranquility or false sense of security could ultimately be problematic, as with only weeks to go until the September Fed meeting, the winds of change could come swiftly.
According to Paul Krake, founder of Hong Kong Investment Firm, "We have so much event risk over the next six weeks: tapering, German elections and a decision on the Japanese consumption tax. Markets are going to be incredibly volatile.”
First take: FOMC tapering initiative
The first and perhaps most crucial of these events will be the widely anticipated Federal Open Market Committee (FOMC) meeting on September 17-18, where Fed chairman Ben Bernanke is widely expected to scale back the bank's $85 billion per month bond buying program by $20 billion per month.
However, after months of speculation and schizophrenic reactions to any mere mention or indication of tapering, many analysts fear a heavy correction once the tapering finally does takes place. Ultimately, Krake suggests that although he expects the event to cause volatility, the reaction might not be as severe as many expect.
"You're going to have a near term correction of around 5% [in the S&P 500], maybe a little more, in the big picture that's nothing," he said. "There is going to be a realization that despite that fact that the Fed is going to be buying less bonds they are still going to be buying bonds, just at a slower pace. At the end of the day policy is very constructive for equities."
German elections hold sway
Following the vaunted FOMC meeting, traders will have only a few days to recover before yet another major risk mover – the German elections on September 22, tabbed by many as the most important event of the year for the European economy.
Chancellor Angela Merkel is widely seen to have the inside track, though the event is surely bound to cause some measure of volatility in the run-up and in the ensuing aftermath. On Sunday, Merkel warned her supporters not to get complacent over her expected win, warning that the election would be a "close call". Germany is the most important economy and most influential leader in Europe. While it will invariably be a positive response if/when she wins, markets would almost certainly be roiled in a kneejerk maelstrom if she lost.
JPY could see massive surge on Japanese setbacks
The third major risk event to shape markets in the next six weeks will be the Japanese government's decision on whether or not to push through its plans for a consumption tax hike. In looking at the proposal, the tax aims to hike the rate from 5% to 8% in April next year and to 10% by October 2015. The tax hike is considered as a vital step towards getting Japan's fiscal house in order, but critics say it risks damaging the county's fragile growth trajectory. A decision on the issue is expected to be taken in late September to early October. Perhaps more worryingly, any delay would cause a sweeping sell-off in Japanese equities, and a surge in JPY strength. "If they walk on this, foreigners will react badly and dump Japanese equities. It's not a yen weakening event, it's a yen strengthening event as that's a risk-off scenario," Krake warns.
According to Paul Krake, founder of Hong Kong Investment Firm, "We have so much event risk over the next six weeks: tapering, German elections and a decision on the Japanese consumption tax. Markets are going to be incredibly volatile.”
First take: FOMC tapering initiative
The first and perhaps most crucial of these events will be the widely anticipated Federal Open Market Committee (FOMC) meeting on September 17-18, where Fed chairman Ben Bernanke is widely expected to scale back the bank's $85 billion per month bond buying program by $20 billion per month.
However, after months of speculation and schizophrenic reactions to any mere mention or indication of tapering, many analysts fear a heavy correction once the tapering finally does takes place. Ultimately, Krake suggests that although he expects the event to cause volatility, the reaction might not be as severe as many expect.
"You're going to have a near term correction of around 5% [in the S&P 500], maybe a little more, in the big picture that's nothing," he said. "There is going to be a realization that despite that fact that the Fed is going to be buying less bonds they are still going to be buying bonds, just at a slower pace. At the end of the day policy is very constructive for equities."
German elections hold sway
Following the vaunted FOMC meeting, traders will have only a few days to recover before yet another major risk mover – the German elections on September 22, tabbed by many as the most important event of the year for the European economy.
Chancellor Angela Merkel is widely seen to have the inside track, though the event is surely bound to cause some measure of volatility in the run-up and in the ensuing aftermath. On Sunday, Merkel warned her supporters not to get complacent over her expected win, warning that the election would be a "close call". Germany is the most important economy and most influential leader in Europe. While it will invariably be a positive response if/when she wins, markets would almost certainly be roiled in a kneejerk maelstrom if she lost.
JPY could see massive surge on Japanese setbacks
The third major risk event to shape markets in the next six weeks will be the Japanese government's decision on whether or not to push through its plans for a consumption tax hike. In looking at the proposal, the tax aims to hike the rate from 5% to 8% in April next year and to 10% by October 2015. The tax hike is considered as a vital step towards getting Japan's fiscal house in order, but critics say it risks damaging the county's fragile growth trajectory. A decision on the issue is expected to be taken in late September to early October. Perhaps more worryingly, any delay would cause a sweeping sell-off in Japanese equities, and a surge in JPY strength. "If they walk on this, foreigners will react badly and dump Japanese equities. It's not a yen weakening event, it's a yen strengthening event as that's a risk-off scenario," Krake warns.