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Welcome back, readers! Friday is upon us and the markets are yet again grasping at gains after the momentous slide of the past month. Forget Facebook, forget the Apple WWDC (World Wide Developers Conference) this month. Despite the ‘buzz stories’, the real attention grabber should be the Federal Reserve.
A lot can be taken from Federal Reserve Chairman Ben Bernanke’s comments this week, which presented a rather hawkish outlook for the US trading environment.
As we have explored over the past two weeks, the real focus remains Europe. A Greek bailout has the potential to place devastating pressure on European markets as demand for goods and services falls. So watch out Billabong (ASX:BBG) and any other companies relying heavily on European demand. They will have as much investor credibility as the current Australian government. (Not much!)
US-centric market performance offers some hope, albeit perhaps false hope. The US Markets have bounced 3% in the past few sessions as bargain-hunting traders and investors tire of the recent equities sell-down. Don’t underestimate the power of the Fed and the potential for further stimulus around the corner.
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Many will see the recent bounce as a mere mid-plunge shake-out but it could be the beginning of a long awaited up-tick in optimism. The overall picture looks bleak but right now investors are more likely to take a ‘glass half-full’ approach, particularly toward well-capitalised companies.
Obviously, many took note of Bernanke’s comments today:
“As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”
Regardless of the cryptic rhetoric, markets are likely to see this as predictive of further economic stimulus and/or continued record low interest rates into 2014 and beyond. So far, the handling of US stimulus measures has - despite the criticism - avoided a cataclysmic disaster in the US economy. Stocks have risen by 84% from their lows of 2009, making this most recent correction merely a blip on the radar of a much larger recovery. Many traders who predicted further pain and lows surpassing those of the Global Financial Crisis have missed one of the best and most profitable runs in recent years. In fact, US markets continue to grossly outperform the Australian benchmark indices. Tight management and prudent action have built faith in investors and is likely to spur further US buying at current levels.
Renewed faith in US markets is here and usually global markets follow suit. Regardless of whetheror not sentiment is based on false hope from the Fed, we may re-visit index lows in the near future. Timing is everything. Markets seek short-term direction and right now that direction appears to once again be bullish.
Stay Ahead of The Game,
Lachlan McPherson
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