Business Blog Posts

Fed action -- if it happens -- is no longer viewed as the elixir for the stock market it once was.

Wall Street tumbled over 2 percent on Friday as investors fretted more about the economic outlook rather than looking ahead to another round of Fed bond buying.

Next week, the question of whether the Fed will step up to the plate with another round of quantitative easing will take center stage with a highly anticipated speech from President Barack Obama. That could make for another volatile week.

This time last year, anticipation of a second round of quantitative easing, or QE2, sparked an almost uninterrupted rally that lifted the S&P 500 around 30 percent from August to May.

What a difference a year makes. Confidence in policy makers is sapping away as the economy languishes, the United States grapples with the loss of its top-notch credit rating, and the European Union seems to be coming undone at the seams.

Wall Street sees an 80 percent chance the Federal Reserve will intervene in the bond market to lower long-term interest rates, according to a Reuters poll on Friday.

But Friday's action in the stock market signaled that equity investors do not see that prospect as silver bullet for their woes. The broad-based S&P 500 index fell 2.5 percent on the day.

"This downdraft is based on sentiment and that has to be turned around," said Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago. "I think we're in for a longer trend of either malaise or just a down channel."

That means traders and investors who were hoping for a return to normalcy after extreme volatility in August may have to wait a little longer.

Obama is due to address a joint session of Congress on Thursday to lay out plans to create jobs, boost economic growth and lower the deficit.

He faces an uphill struggle when it come to reassuring investors, who fault the lack of consensus in Washington. Heading into an election year, the disharmony is not likely to get better any time soon.

Nonfarm payrolls were unchanged last month, the Labor Department said on Friday, and figures for previous months were also revised down to show employers created a combined 58,000 fewer jobs than had been thought in June and July.

The U.S. Treasury market rallied after the data as Goldman Sachs and other U.S. primary dealers -- big Wall Street firms that do business directly with the Fed -- said they expect the U.S. central bank to start buying longer-dated bonds after its September 20-21 meeting.

Seasoned traders say that August's extreme volatility was one of the most trying periods in living memory, outstripping the 2008-2009 meltdown and the 1987 stock market crash on Black Monday.

"I've been doing this for 20 years and it's never been more exhausting," said the chief executive of a New York-based proprietary trading firm, who said many of his traders closed out their positions in August, reducing the firm's inventories to just 15 to 20 percent of what they could be.

At least some of that volatility looks set to spill over into September until there is more clarity over the economy and what the Fed is likely to do at its September 20-21 meeting.

But some fund managers who take a more long-term view are using pullbacks to cut back positions that have done less well while increasing positions in their preferred stocks.

Many fund managers are still convinced the U.S. economy will avoid a recession and stocks will rally into the end of the year.

One of them, Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, does not expect the Fed to act this month. He is not expecting a recession, but admits he has become more defensive.

"We used some of the volatility to swap out lower yields for higher yields, believing that a combination of income with capital growth potential will help us weather days like today," he said. "Equity values should still hold their own if not appreciate given the still-good corporate profit picture."

(Reporting by Edward Krudy; Additional reporting by Ryan Vlastelica; Editing by Leslie Adler)

Yes, it was the worst month for global equities since May last year and the worst August since 1998. But investment doesn't depend on the moon's cycles.

If you had bought into MSCI's all-country world index at the low on August 9, you would have gained a healthy 8.5 percent or so for the rest of the month.

So there is a flicker of brightness heading into a new week. But it could easily be extinguished by the grim economic picture, the near-toxic, euro zone debt crisis, and policymaker struggles over what to do next about both.

The past week was a harsh reminder of the fragility of global growth, exemplified by Friday's extremely poor U.S. jobs data and a series of weak global manufacturing reports, including from supposed euro zone powerhouse Germany.

As a result a big focus of the coming week will be the Group of Seven finance ministers and central bankers meeting in Marseilles at the weekend.

Investors will be looking for some degree of cohesion and coherence from the meeting about both the state of the economic slide and what policymakers are going to do about it.

In short, there is a basic assumption that at some stage more asset-buying quantitative easing (QE) to pump up markets and growth is on the cards, with the only questions being when and in what form.

"It's inflation-dependent. There is probably a bias to do it but it's difficult to justify with higher inflation," said Jeremy Armitage, global head of research at State Street Global Markets, explaining central bank caution.

Minutes from the Federal Reserve's latest meeting, released in the past week, nonetheless suggested that the Fed may be closer to a third round of QE than Chairman Ben Bernanke implied in his Jackson Hole speech.

Bank of England dove Adam Posen, meanwhile, called in a Reuters blog -- r.reuters.com/vur53s -- for a new round of G7 QE to offset large fiscal contraction in major economies.

Various central banks also meet during the week, including the European Central Bank, which may be forced to take a more dovish tone given the deteriorating euro zone economy and debt crisis.

HERE COMES THE JUDGE

The euro zone crisis has taken many forms, but basically entailed member state countries coming together after a lot of public angst and cobbling together compromise bail-out packages for Greece and other peripheral laggards.

Some of that could easily unwind in the coming week. For a start, Germany's Constitutional Court, is to rule on Wednesday whether Berlin broke the law by contributing to the bail-out packages.

That goes along with news that the international lenders mission that includes the International Monetary Fund has left Greece without determining whether Athens has met conditions for the next tranche of emergency loans.

It is widely expected that the German court will say the government was within the law -- which could lift core euro zone bonds -- and the IMF move is being played down as being "technical."

But both the upcoming judgment and what the IMF did are the kinds of things that build uncertainty, which financial markets abhor.

Focus, in the meantime, has been shifting toward Italy, which is struggling to come up with its promised austerity package. With a 1.9 trillion euro debt pile, yields on 10-year government bonds have crept up steadily since the ECB intervened last month to buy Italian paper.

Anecdotal evidence of large-scale ECB buying to ensure Italy and Spain could sell bonds this past week may be confirmed on Monday in the bank's latest bond purchase data.

Greece is to auction 1 billion euros of six-month T-bills on Tuesday. It has been forced to concentrate its borrowing via monthly short-term debt sales.

BARRIERS

Both ailing global growth and the European debt imbroglio may actually be obscuring attempts by investors to get back on- track after the misery of the northern hemisphere summer.

The performance of global stocks in August suggests that most of the bearishness was linked to the uncertainty over Standard & Poor's downgrade of U.S. debt.

The month ended with a four-day rally -- since broken -- and the latest figures from Thomson Reuters' Lipper show U.S. equity funds with net inflows of $6.3 billion in the week to Aug 31, the largest influx for 17 weeks.

Reuters latest asset allocation polls also show hefty cash holdings among leading investors, meaning that money is available to move.

All it may take is a little more certainty.

(Additional reporting by Mike Dolan; editing by Stephen Nisbet)