Market Update: The difficult art of information

Week 20 - 24 May 2013

Wednesday, Fed chairman Ben Bernanke, delivered a much anticipated testimony on the state of the economy before Congress. The prepared statement did not reveal anything new, however on the following Q&A session, Mr. Bernanke informed the Joint Economic Committee that the Central Bank within the next few Federal Open Market Committee (FOMC) meetings could start slowing the pace of its monthly bond purchase program should labor market conditions improve. Investors cautiously awaited not only the testimony but also the release of the FOMC’s minutes from its April/May meeting which came only few hours apart and revealed that a “number” of the committee members were ready to reduce the QE purchases as early as the next meeting in June.
The combined message provides the clearest picture yet of Fed’s future bond purchases, which according to Morgan Stanley’s Chief US Economist Vincent Reinhart could be tapered off starting September.

Thursday, the preliminary Chinese purchasing managers’ index for the manufacturing sector, published by HSBC, came out pointing to a decline in May to a 7 month low. The worse than expected drop, indicates the industrial production of the worlds’ 2nd largest economy is slowing down. The soft China-PMI together with Mr. Bernanke’s hint of a possible early QE retreat sent the global equity markets on a rollercoaster ride from Thursday to Friday. Japan’s main stock market Nikkei 225 plunged 7.3% Thursday, its biggest 1-day fall in percentage terms for 2 years. The panic eased during the European session, and had almost vanished during Wall Streets’ opening hours.

Friday, on what started out as a bullish day for Japanese equities, panic broke out and sent the Nikkei down with up to 3%. This time however it was not due to external conditions, but due to the newly installed Bank of Japan Governor Haruhiko Kuroda confusing the markets by saying that enough monetary stimulus has been announced, a remark meant for stabilizing the government bond yields, but created uncertainty whether Mr. Kuroda fully understand the mechanism of the ongoing BOJ operations. Later during the morning Japanese equities returned into positive territory and ended up almost 1% once the market calmed down and excused Mr. Kuroda’s remark as a communicative mistake. 

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