Not much happened yesterday, so markets panicked.
Sure, there were reasons for the panic. It’s just that under different circumstances yesterday’s news might not have led to a fall in share prices at all.
First of all there was the Fed. It seemed somehow irrelevant. The minutes for the last regular meeting of its monetary policy committee were released yesterday. This was the meeting that chose to leave rates alone, and made an announcement at the time that was nearly identical to the announcements made every month this year.
As for what the minutes said? Well, it appears the Fed nearly got it right. It was still worried about inflation, but said, “#133;the recent strains in financial markets posed additional downside risks to economic growth. Members expected a return to more normal market conditions, but recognized that the process would take some time, particularly in markets related to sub-prime mortgages.”
“However,” added the Fed minutes, “a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response. Policymakers would need to watch the situation carefully.”
Of course, since the meeting those minutes relate to, it was indeed forced to do exactly what it said it might have to do: it lowered the discount rate of interest stating that the downside risks to economic growth “have increased appreciably.”
So, there was really precious little in yesterday’s minutes which wasn’t implied by the later meeting and announcement.
You can have a better understanding of market reaction when you examine the second piece of news that spooked traders. Sales of existing US homes fell to a five-and-a-half-year low in July, at the same time the monthly supply of unsold homes was at a 17-year high. House prices fell by 0.6 per cent in the year to July. Sure, that’s all pretty worrying, but hardly new. Home sales were down to 5.76 million, but then in the month before they were 5.75 million: a tiny drop over the four-week period.
Finally, there was the latest consumer confidence index. Some news reports have made much of this. The US consumer confidence index published by the Conference Board fell to 10.5 in August, from 11.9 in July. It’s a big drop, but then when you consider that actually the real anomaly here was the consumer confidence index last month, which hit the highest level for many years – in fact August’s score of 10.5, was only a tad lower than the score seen in June. And while it is true to say the index stood at its lowest level this month for a year, given what’s been going on of late you would have thought the markets would be pleased to see the index remain so solidly above the zero growth level of 100.
Perhaps a better explanation for yesterday’s falls was profit taking, with traders keen to cash in after last week’s comeback.
But, overriding all these arguments, it seems we have moved to a situation in which markets interpret just about anything as being bad news. Not so long ago it was the other way round. Markets seemed to soar whichever way the coin fell, now the nerves are very taut. One whiff of bad news and selling becomes the order of the day.
Let’s just hope we don’t see some really bad news.
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