Beyond QE3

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Beyond QE3

Last week the Fed delivered its new round of QE3, while the German Constitutional Court finally approved the European Emergency Fund, smoothing the German participation within the fund, but not without setting tough conditions.

According to the Fed’s statement, the central bank will purchase $40 billion worth of mortgage debt each month until the labor market shows sustainable progress. The aim of this action is to suppress the cost of borrowing to buy a home as prices rise and yields fall. Falling yields in mortgage may push investors to leave the mortgage bonds and turn towards buying other assets. As demand goes elsewhere, such as corporate bonds, these bond prices will go up and yields will go down. Hence, borrowing costs will fall, enabling individuals or companies to borrow at cheaper price.

To conduct this operation, the Fed credits accounts of the banks from which it purchases the debts. In effect, money is added into the system. Afterwards, it will be up to the banks to lend the money to businesses and/or individuals who in turn, will use the money for spending. More spending, more hiring, and thus, more economic activities.

While studies show that the Fed’s move may reduce borrowing costs, how such condition would impact the economy remains unclear. The $600-billion-QE2 for example, according to studies, created 700,000 new jobs. The question is, however, how long would it take to effect and how long (should it take effect) would it last?

No Surprises from Vosskuhle

As the top German of the week last week, Andreas Vosskuhle handed out a somewhat win-win decision on the European bailout fund ruling. The constitutional court approved the European bailout fund which cleared the throat for a while but not necessarily the cure for European crisis. At least, that cleared one fog over the matter as the zone can now move on to decide how they can make use of the fund to end the crisis.

The German ruling was not without a catch, however. The court stated that Germany’s involvement in the fund will be strictly limited to $244 billion. If the amount should be increase beyond that threshold, the parliament should approve it with both upper and lower houses must be kept fully informed. Germany must also ensure that it is now entirely bound by the ESM Treaty and that some reservations must exist should the ESM do not serve the German public interest.

Uncharted Territories

Nevertheless, the markets cheer the Fed’s move as well as Vosskuhle’s ruling, and Jakarta Composite Index zoomed to uncharted territories on Friday. The new week also potentially bullish for the moment as the residual euphoria remains intact, although at a reduced rate.

As the key resistance level at 4,235 had been broken, the JCI leaped past its subsequent Fibonacci target at 4,263.65 and went to as high as 4,269.05. So, this brings the next target into the radar: 4,652.06. Of course, it’s a long shot at the moment, but its 10% distance from the current level seems to be attainable this year. On the flip side of the coin, the support for JCI is seen at 4,235 as prior resistance turns into support.

Portfolio Update

BMTR continued to climb higher, but somewhat stalled at 1,900. The position remains on hold for now, but we ought to stay cautious. Near-term target is seen at 1,910, and subsequently 2,180. Other components of the portfolio remain in the red, however, but the positive development on Friday improved the total portfolio by 1.19%.

By: Unknown On 19.12

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Readying Its Bazooka

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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 1^st 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.

By: Unknown On 02.18

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Eyes On ECB

After getting squeezed for weeks, BMTR finally came up and resurfaced. The stock broke out of its consolidation to reach 1800 and it looks set to add more gains in the coming sessions. Still, the question remains whether the rally is sustainable as the global outlook remains cloudy. 

Central bankers are the key figures this week as the Federal Reserve’s FOMC meets, followed by the European Central Bank meeting. The recent rally came out of the hope that both central banks will introduce some more incentives to kick-start growth again. The rallies eventually turned out of steam as markets booked profits ahead of the meetings. 

Data coming out of U.S. showed that the manufacturing activities contracted for a second month in a row in July. The ISM index were down from 42.2 to 49.750.2

Elsewhere, the ADP said that US private sector had added 163K workers in July, a good sign that the nonfarm payrolls, which is due on Friday, will show a good number enough to boost sentiment.

The Federal Reserve’s FOMC meeting failed to deliver specific plan to stimulate the ailing U.S. economy. The Fed said that it will monitor the market conditions and provide more accommodative policy whenever needed. As no specific plan was laid out, the market seemed to be disappointed. Still, there is still one more CB event to unfold: the ECB meeting. 

The final key event this week is the nonfarm payrolls data set for release on Friday. We already had the sentiment shot once by Fed’s indecisive decision and we have two more opportunities to provide the needed boost for the market this week. If both also fail to impress, the market will be at risk of collapsing again.

By: Unknown On 19.54

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