Thursday, October 1, 2015

Equities take a hit and it’s all the Fed’s fault | Non-Farm Payrolls today

As measured by the Dow Jones Industrial Average (above) the equity market has been in decline since the middle of the summer, with a really significant drop in August. For many investors and traders, it is not where the index is now that is important, but rather where it is headed in the future.

While we cannot help there, we can discuss the factors that have brought it to where it is. This fall is not happening in a vacuum, but must be seen in the context of a steady and sustained rise in stocks since the inception of Quantitative Easing in the US, which was preceded by a lowering of interest rates. The fall in rates resulted in cheap money for institutions, while QE made more of it available. Where better to put those funds than into stocks? The normal rules of supply and demand will take over in a situation such as this and stock prices will rise.

Now the era of cheap money is coming to an end. QE is already history, so flooding the banks and similar bodies with cash has already stopped. A reversal of the rise in equities and equity indexes seems appropriate.

But right now, there could be more to it than that. The decision of the US Federal Reserve not to raise interest rates at its last meeting, which is what many were expecting, could have been down to fears of inciting another ‘taper tantrum’, as we discussed yesterday. Or it could have a more profound cause – it could be interpreted as the result of intelligence held by the Fed that indicates that the global economy is not in anything like good shape at present.

Such a realisation by the large buyers of equities could also be expected to result in a fall in stock prices.

Non-Farm Payrolls today

Today is US Non-farm Payrolls day. This is perhaps the most closely watched indicator of the economic wellbeing of the United States, and the single most important determinant of whether or not it is deemed likely that US interest rates will, at long last, start to rise.

The ADP private company, which administers the payrolls of a great many of the employees in the US, brought out the results of its monthly survey earlier this week. This report attempts to anticipate the official NFP outcome.  It showed a rise of 200k jobs for last month - right on the number that is regarded as a healthy month-on-month increase. If this is replicated in the government figures today, it will intensify the pressure for core interest rate rises.

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