Business News

No QE3 just yet!

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by Peter Switzer

Ben Bernanke has the market Midas touch with Wall Street staging a nice rally, despite the looming black clouds of Irene bearing down on New York City.

At the same time last year, Ben spoke at Jackson Hole and talked about QE2 and this time at the same venue, he didn’t give the nod to QE3 expectations and again the market liked it.

For the record, the Dow was up 134.72 points, or 1.21 per cent, to finish at 11,284.54. The Nasdaq had a biggie, up 60.22 points, or 2.49 per cent, to wind up at 2479.85, while the S&P 500, the more important index, gained 17.53 points, or 1.51 per cent, to end at 1176.8.

Overall for the week, the Dow was up 4.32 per cent, while the S&P 500 racked up 4.74 per cent. That’s the best gain for a week in around two months and now the Dow is down 2.53 per cent for the year and the S&P 500 is off 6.43 per cent.

The local S&P/ASX 200 has shed 11.7 per cent and this has been an excessive overreaction, which I believe will be offset over the course of this calendar year and run up for a positive finish for the financial year, as it has done for the past two years.

View from the States

Bernanke talked about using “additional tools” to help the economy but didn’t fall into QE3 speculation. He virtually said, 'I’m watching and I’m ready to act if I have to' but at this stage, like a professional poker player, he inferred that he was 'holding'.

His failure to rush to support suggests to some that maybe the US economy won’t hit recession — which I agree with — and recovery might be achievable without extra QE actions.

I have just come back from the States and I do think the economy is softer than I thought it would be three months ago but most economists are in the one per cent or so growth camp for the overall economy.

This positive market reaction was good considering the pending threat from Hurricane Irene, which luckily for me, went past Florida, where I was conferencing.

I think the $5 billion bet on Bank of America by Warren Buffett was also a positive underpinning for the market as well as the US economy but now the actual economy has to start gradually delivering results.

On Friday, GDP growth for the second quarter was one per cent, which was less than expected but was better than some had tipped. A negative number was on the cards given the weak economic readings over the June quarter. Also, consumer sentiment actually went up — a green shoot but it’s only a small one.

Personally, I want to see some good news out of Europe this week and if they deliver, there could be more gains for stocks.

Out this week

In the US, there’s a lot of market-sensitive data including consumer confidence, home sales, home prices, personal income as well as spending and the all-important job numbers on Friday. We have seen some job creation in the stats lately but we know some big companies have been shedding workers, especially in the financial sector.

I reckon Ben could come at a QE3 but he will only do it if the economic entrails point to a recession looming. The fact he didn’t play the QE3 card on Friday buoyed Wall Street, which has been overreacting on the downside for long enough.

On the local front, we get new home sales (Monday), building approvals and household income (Tuesday), home prices (Wednesday), and private investment along with retail figures on Thursday.

This should be food for thought for the RBA, which will consider interest rates on Tuesday week, however, Glenn Stevens still seems stubbornly supportive of a 'rates on hold' strategy. Until he relents and cuts, I suspect our economy will remain weak.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, August 29, 2011

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