Tuesday, 14 August 2012

A little more than 1 percent away – today!

Bank of Japan HQ. Source: Wiki
Earnings growth is reflecting the loss of momentum throughout the global economy and consensus estimates for the current year are continuing to be revised downwards.

Yet equity markets are unfazed - their focus is squarely on the central banks. Federal Reserve policy is pro-growth, and this also broadly applies to the People’s Bank of China and the Bank of England.

As for the ECB, the focus of market attention is the likely framework, yet to be delivered, for a stabilisation policy. Stabilisation policy, if it helps to bring down bond yields, can be pro-growth too.

The Bank of Japan (BoJ) seems less engaged on the pro-growth front. While it has been pursuing an easy monetary policy for over a decade, an inflation target of 1 per cent when deflation remains entrenched suggests a degree of restraint on the energy level the BoJ feels is necessary in actively managing monetary policy.

At the end of this month when the Federal Reserve Bank of Kansas City hosts its annual symposium, the Federal Reserve Chairman will have the opportunity to comment on the economy and may preview the likely options for more stimulus if required.

Also, the ECB is now expected to deliver at its meeting next month on the detail of a broader framework for aiding the transmission mechanism for a smooth functioning of monetary policy. Disappointment is unimaginable. A week or so later, the German Constitutional Court rules on the legality of the European Stability Mechanism, one of the instruments for policy stabilisation, and the Treaty underlying the fiscal compact. The ruling is expected to be favourable – and no delay on the date of the Court’s verdict is expected. 

It sounds like a positive backdrop for equity markets, which have been surprising on the upside since early June. Their pattern of rising highs and lows over the past few months, exemplified distinctively by the S&P 500 suggests that ‘the trend is your friend’. For the S&P 500, a new post-financial crisis high is a little more than 1 per cent away. We are overweight the US and also overweight equities overall. Market Tactics from Brewin Dolphin >

Mike Lenhoff
Chief Strategist

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