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Readying Its
Bazooka
At its monthly meeting Thursday, the European
Central Bank President Mario Draghi had announced the central bank’s initiative
to rescue the euro through its plan dubbed Outright Monetary Transactions
(OMT).
Under the plan, the ECB will purchase unlimited
amount of government bonds with one to three years of maturities, as well as
longer-dated ones with one-to-three years of maturities left. To neutralize the
impact of such move on the money supply, the operation will be sterilized,
which means that the ECB will take away the same amount of money it brings to
the system through the purchases. There’s another catch: in order to have the
ECB make the move, the troubled governments would have to request the aid, and
they will have to play by the rules. If the rules are broken, the ECB will stop
the purchases or it will sell the bonds it had bought previously.
The ball is then, at the governments’ courts. Draghi
himself in turn, has readied the ECB’s bazooka while the IMF will assist in
designing and monitoring each applicant country’s specific plans. ECB alone
will decide how the program will be executed.
Despite that investors are cheering the ECB’s bold
move, in the long-run the policy risks pulling the entire system down,
especially if the troubled countries fail to produce something positive out of
the austerity program. In the meantime however, the decision seemed to have put
off some pressure from the ECB and somewhat transferring the pressure on to the
governments of the troubled countries. Spanish PM Mariano Rajoy for example,
said that Spain will examine the details of the government plan before deciding
to take on the OMT.
In the end, the problem lies within the fiscal area
and trying to cure it by using monetary tools may be a bit of a stretch. After
all, Hans-Werner Sinn of the Ifo Institute might have been right after all,
Greece should’ve been left out long ago when the country was caught “cheating”.
Awaiting the
Fed’s Move
A mixed bag of economic data released this week
could prolong the timing of Fed’s move on monetary policy. ISM Manufacturing
for August showed a further drop towards the contraction zone, from 49.8 to
49.6 while the market had expected it to improve to 50. From the service
sector, the ISM figure showed improvement from 52.6 to 53.7, better than what
the market had expected. Construction spending on the other hand, showed a
decline of 0.9% in July after a 0.4% increase in June. Strong auto sales
however, provided a bit of relief on the consumption side as total vehicle
sales reached 14.46 million in August, better than 14.05 million booked in July
and also better than the consensus number of 14.2 million. Domestically, sales
also exceeded the 11.03 million expected by analysts as it reached 11.54
million in August, better than July’s sales of 11 million units.
Another batch of data showed that non-farm
productivity estimate has been revised upwards from 1.6% to 2.2%, better than
1.8% expected by economists. Unit labor costs also moderated from 1.7% to 1.5%.
Elsewhere, ADP employment change showed a strong figure in August, adding 201k
jobs in the private sector. The data – which is considered as a guide to the
U.S. NFP scheduled for release on Friday – outpaced July’s figure of 173k as
well as exceeding the market’s expectations of 140k. More good news came out of
the labor market as initial jobless claims for the week ending September 1st
slipped to 365k, less than 370k expected and also came in lower than 377k
registered during the prior week.
Friday will see the release of the NFP data.
Expected at 130k, down from 163k scored last July, the data will be accompanied
by the unemployment rate data which is seen stable at 8.3%. While the
expectations are on the lower side, the data has the potential of giving out an
upside surprise. If the payrolls turn out to be better than 163k, or even
higher than 200k, we could see stocks advance in celebration. Yet, this could
be a double-edged sword as strong data ease off the pressure on the FOMC to
launch another round of stimulus.
Back to Square
One
After made a strong rally last week, ELSA failed to
maintain its gains and crashed back below 170 and just above its recent low at
162. BMTR on the other hand, remains the better performing stock as it keeps on
knocking on the heaven’s door. A clean breakout will catapult the stock higher
towards its technical objective at around 1900-1920. This will be considered as
a potential exit point. On the other hand, GZCO and RAJA remain in the doghouse
for now as both still struggling to claw their ways back up. Nevertheless, there’s
no plan in changing the portfolio composition except eyeing for an exit for
BMTR at around 1900-1920.
Jakarta Composite Index (JCI) itself seems to be
building up its own momentum to launch another attack to the upside. Recent low
at 4065 will be the key anchor to the index’s structure. A failure to hold this
support line could risk a straight decline towards the primary support at 3978.
On the other hand, the success in breaking through the resistance at 4128 today
has triggered the Fibonacci projections at 4158 (practically reached as the
current intraday high is at 4154), 4215 and 4308.
Written by Unknown
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