Hole lotta trouble if Ben doesn't deliver

Global Equities markets have been more bouyant over the past trading sessions as attention switches to Fed Chairman Ben Bernanke and other Central Bankers' annual get together at Jackson Hole in Wyoming. The reason that this conference is so important is that last year set a precedent, in that QE2 - round two of the Fed's Quantitative Easing programme - was announced, and markets are clinging to the hope that more stimulus will be signalled this year.

In simple terms, Quantitative Easing (or QE for short) is a monetary policy tool which is used when all usual stimulus measures, such as lowering of interest rates, have been exhausted. It involves the printing of money which is then used to purchase assets (in the case of the US QE programme, US Treasury Bonds). The effect is to reduce the yield on these Bonds, and as these are often held by banks, to increase banks' liquidity to lend to business and consumers. The first wave of QE was introduced shortly after the Lehman Brothers collapse in 2008 and the second round was put into action last year.

A major talking point is whether QE3 is necessary or even welcome. The previous rounds of QE1 and QE2 lowered the yield on Treasury Bonds, so much so that the yield on the 10 year note briefly touched 2% last week.  In other words, lend the US Government your money for 10 years and they will pay you 2% per annum until 2021. Banks certainly do not need more liquidity at this time - they are simply hoarding it as households and businesses are in a mood to deleverage and pay back existing debts rather than take on new loans. It also failed to stimulate any response in the limp US housing market. QE also introduces inflation, which continues to sit above the Fed's target, and reduces the spending power of household income.

That said, Bernanke will not want to disappoint a febrile market and investors expect that  "Helicopter Ben" (as Bernanke has been a little unfairly labelled) to come to the rescue once again and give markets another shot of adrenaline. The absence of any meaningful announcement at Jackson Hole will be seen as a failure, and may send markets lower once again. Any respite in the markets may be short-lived as QE at this time would, in my opinion, be ineffective at bolstering economic growth or creating jobs, which the US needs to build a firm foundation for recovery.

The search for growth

Markets have lurched from one crisis to the next over the last few weeks, and the unexpectedly weak German GDP data on Tuesday did leave to alleviate the unease.

For a country that has posted impressive growth data over the last two years, bucking the global downturn, growth of just 0.1% between April and June is something of a major shock.

Germany is not alone in declaring that the second quarter of 2011 was tough going. French GDP was flat and for the two countries that are seen as being the main protagonists in ensuring the continuation of the Eurozone project, it is more than a little disconcerting.

What it does, however, do is paint the UK's GDP growth of 0.2% for the same period in a better light. That said, 0.2% growth remains painfully anaemic and perilously close to sliding back towards recession once again. And it appears that the UK consumer is not willing to play their part. UK retail sales nudged forward by 0.2% in July, with spending on big ticket items down over 4% year on year. It is hardly surprising given the pressure household incomes are under, plus the appetite for consumers splurging on the credit cards continues to abate

Just to compound a bleak few days on the economic data front, US weekly unemployment data showed an increase in claimants, and US inflation numbers surprised to the upside.

At the time of writing, the FTSE is down nearly 4% and has given back one half of the gains made since the market dive bombed almost 1000 points in the beginning of August. Where does one head in markets like this? Well, Gold is up over $20 an ounce on the day and money continues to flood to UK Gilts, with the 10 year yield now down to just 2.4%.

It appears we will be staying in "risk off" mode for some time to come.

The Bear returns in Au-gust

With the FTSE 100 touching 4800 during early trade on Tuesday, a new bear market was confirmed, as the leading index of shares had fallen over 20% from the recent highs. Stocks around the globe had been pummelled over concerns that US growth would falter, the S&P downgrade of the US to AA+, lingering worries over Italian and Spanish debt, and to add the icing on the cake, rumours abound that France is also to lose its' AAA rating. The French Government have been quick to denounce the rumours, and indeed S&P and Moodys have confirmed the French economy remains AAA. However, the damage is apparent as leading European bank shares crumbled to their lowest level since 2008.

Even the Federal Reserve's extraordinary act of clairvoyance on Tuesday night , where they stated that the Fed Funds rate will remain at 0.25% for at least until Mid 2013, was not sufficient to calm the market's fears.

Through all the volatility and pessimism, the key to remember is that we are in August, a time when many traders are away from their desks. Whilst trading volumes have been modest, many commentators are speculating that much of the volatility is being driven by computerised programme orders and stop losses. This can perhaps explain some of the wild intra-day swings we have been experiencing, but one certainly cannot deny that the risks in the market have increased substantially over the past week. It is possible that markets will find a floor at around current levels stage a modest rebound, as technical indicators suggest most global indices have moved into "oversold" positions. However, until the negative newsflow abates, any respite may be short lived.

Meanwhile, Gold continues its' stellar run, turning August into Au-gust. Gold burst through $1800 an ounce yesterday, and is homing in on our long term target of $2000 an ounce.

No need to panic....just yet

Whilst its' timing was questionable, Standard & Poors bloodied the nose of the Obama Administration at 8.00pm Eastern time on Friday night, by stripping the USA of its' coveted AAA rating. Citing the political wrangling before the increase to the debt ceiling Tuesday last, and the lack of credible debt reduction measures.

To continue the boxing metaphors, the move is akin to a standing eight count. Both Moody's and Fitch have retained the highest grade for US government debt, and S&P were at pains to point out that short dated US debt continues to be rated at AAA.

But what effect will this have? Well, in practice, very little at this stage. Although China were quick to chastise America's "addiction to debt", they remain the largest holders of US Treasury Bonds. Indeed, during trade in the Far East overnight, T-Bond yields moved lower (prices rose). 

S&P now only rates 15 countries at AAA, including the UK and the Isle of Man. The UK have avoided any such downgrade by taking the rather uncomfortable but necessary austerity measures since the Coalition took power in 2010. But we are not out of the woods by any means and our efforts at defecit reduction will be closely monitored.

On top of the S&P downgrade, the surge in Italian Bond yields caused fresh concern over the weekend, sufficient for the G7 nations to put forward a statement effectively saying that they stand ready to support the global economy. Heady stuff. The ECB will begin a programme of buying Italian and Spanish Bonds today in an attempt to reduce the yield on both from 6% to a more liveable 5%.

Equities markets reaction has been fairly muted although they are still reeling from the large slides in the last five trading days. Some commentators have been quick to declare that the bad news is "in the price", although this is not a view that I share. The loss of the AAA rating for the US will certainly deal a psychological blow, and a "double dip" recession is becoming more likely by the day. Meanwhile, we may well be seeing the twilight days of the Euro in its' present form.

The safe haven that is Gold marches onwards towards $2000 an ounce, bursting through the $1700 barrier in Asian trade. A useful insurance in any investment strategy, it is proving' its worth as such once again.

So whilst I would certainly counsel anyone not to panic, the global economic picture is changing rapidly. Central Bankers and Governments will undoubtedly face some tough decisions over the coming weeks, and the price of getting it wrong could well be severe.

What a difference a week makes...

Following the agreement reached by Democrats and Republicans to raise the debt ceiling by up to $2tn on Tuesday, global stock markets have gone into a tailspin. At the time of writing, both the FTSE100 and S&P500 have lost over 7% during the last week, which is quite a correction.

I am not at all surprised by the markets' reaction. The wranglings over the debt ceiling were simply distracting investors away from a suite of very poor economic prints coming out of the US over the last month. Growth has stalled, consumers are keeping their dollar bills in their pockets, manufacturing has weakened and unemployment has increased. Indeed, jobs will be in the spotlight today as Non Farm Payroll data should prove disappointing. With the debt ceiling problem put aside for another day, investors have been compelled to accept that the US economic recovery is going to be weak for some time to come, and may even lurch back into recession.

If that wasn't enough, Italian and Spanish Bond yields continue to climb as bondholders demand higher compensation for holding sovereign debt. A default of either or both would be an event of seismic proportions and I currently sit in the camp that believes that both are "too big to fail" -however, remember that was also said about Lehman Brothers.

Safe havens during this turbulence have been UK Gilts, US Treasuries, quality Corporate Bonds and Gold. Advisory Client portfolios have been positioned in these areas for some time, and have been mostly unchanged during the last week. With this shakeout set to rumble on for a little while yet, caution remains the watchword.