Global equities have taken a battering over the past 24 hours. Why? The main reason seems to have been the FOMC minutes, which showed signs of disagreement over when to end or reduce asset purchases. In addition, China’s State Council appeared to call for further property curbs, housing starts fell and came in below expectations, the housing-market recovery being a central pillar of the market’s positive assessment of the US economy (although building permits made a new post-crisis high), and this morning the Eurozone flash PMI’s have disappointed, with manufacturing at 47.8 and services at 47.3.
In addition, with every day that passes it becomes more likely that the rally in USD/JPY has come to an end. If it has come to an end — i.e. if flows from JPY into USD assets have come to an end — then US equities ought to re-couple with their normal drivers. As I argued in January, that should mean that they struggle to rise any further.
I will not quote the important parts of the Fed minutes — Alphaville has pulled out the relevant bits (http://on.ft.com/YD7Fln). The important point is that there appears to be significant disagreement on the FOMC about when to reduce or end asset purchases, in spite of the committee’s stated policy of maintaining them until there is a substantial improvement in the outlook for the labour market. I suspect that Bernanke and his supporters on the committee remain committed to that policy, and have a majority. But they have clearly lost control of the message. It seems that support for the policy on the FOMC was not strong enough to ensure continued, widespread commitment to it, which would have been necessary in order to keep the minutes in line with the stated policy. The market’s assessment of the probability of an early reduction in the pace of asset purchases has increased. I think that it is likely that Bernanke will be able to maintain a majority on the committee if it comes to it, although the need to manage the committee may pull him in the direction of an earlier reduction. I also think that asset purchases are probably having little effect beyond signalling that the Fed remains committed to a very easy monetary policy for the foreseeable future, and therefore that any reduction in the pace of purchases will be most important as a weakening of that signal.
Sterling had a big drop yesterday on the news that Mervyn King voted for more QE at the latest meeting, but was in a minority. This gave the impression that more QE was closer than the market had imagined. There was also some debate about the idea of buying assets other than Gilts — a good idea that Mr. King has long opposed. That suggested that it could be easier for Mr. Carney to begin such a programme when he takes over from Mr. King, should he wish to do so.
US equities may also be selling off because the world is starting to focus on the sequester. Google Trends shows a growing level of interest in the subject (http://bit.ly/YnHwW5). The time could be approaching when the market focuses on this subject — it could cause credit spreads to widen and equities to fall.
Returning to the Chinese property market, the State Council statement said that local authorities should “decisively” curb real-estate speculation, and that price-control targets should be for prices to be “basically stable”. Local governments that had not introduced curbs were urged to do so. Analysts have argued that this is a restatement of existing policy; but Chinese policy is complicated, being 1) decided and implemented behind closed doors and 2) as much a matter of exhortation and command-and-control. This statement could be an attempt to tighten up on the property market. That would be consistent with my thesis that the Chinese authorities will be trying to curb the effects of last year’s credit growth, which they probably consider to have been excessive.