Will the next Fed meeting’s decision really make a difference?

So now we're all on tenterhooks until 18th Sept.

So now we're all on tenterhooks until 18th Sept., when we hear if the Federal Reserve has decided to reduce, (‘taper’), its monthly bond purchases. Traders, Treasurers, pension pot holders, emerging market Finance Ministers-this is what we’ve been waiting for since Bernanke first warned us in May/June it may be coming.
However, this certainly will be no surprise-this is not 1994 with its surprise Fed hike and bond market rout. The Fed has done a fantastic job of delivering an unpopular message-the start of the end of cheap money-in a manner designed to cause the least possible market volatility, and maybe the still buoyant level of the S&P 500 is eloquent testimony to their success. The reasons for the S&P's resilience are important.
Developed market countries' stock markets have retained their poise because US bonds yields have been going up for a good reason-and that is the return of growth and optimism, not just in the US, but also in Europe and China. The rise in 10-yr US Treasury yields from 1.4% to 3.0% is best described as a healthy normalisation, as it has been driven by a reduction in the all-pervading fear which has gripped the market since the Lehman bankruptcy, first, and then the emergence of the Eurozone crisis, once the depth of Greece's fiscal mess became clear.
This basic human response to seek safe-haven has played an equally important part as that of QE in keeping yields subdued.
Only in the last six months have we started to return to the 'normal' modus operandum, in which long term yields are the sum of compounded short rates and the risk premium, the latter being investors' judgement of future liquidity, credit, and fiscal and monetary policy uncertainty over the life of the bond.
Paradoxically, desperate safe-haven flight far outweighed those factors for US Treasuries, and collapsed the risk premium. We have now returned to a normal state of affairs, with the Eurozone crisis also contained, as we all belatedly came to appreciate that political will would easily overcome any economic maladies.
This has lead me to the scary conclusion that while the FOMC's pronouncements on 18th may prompt a temporary rally in US Treasuries, (especially as there is a 50 per cent probability that they will lower the employment threshold for rate rises from 6.5 per cent to 6 per cent), but that will be a great opportunity to sell bonds.
This is a bond bear market-and companies like Verizon are very wise indeed to lock in cheap borrowing. Growth is on the rise worldwide, (even rather anaemically in Europe), and I'm afraid the Fed won't have any room for hesitation driven by concerns over the effect of tapering on emerging markets, as was made abundantly clear by a couple of senior Fed officials at the Jackson Hole conference. No wonder; the Fed-haters in the Senate would have a field day if the FOMC seemed to be managing other countries' economies for them. (Of course, those Senators give no thought for the potential negative feedback effects that an EM crisis could have on the US).
Let's say the Fed doesn’t actually taper QE at all, that will send stock markets soaring and give business confidence another boost-quickly pushing yields higher anyway.

Ben Bernanke Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Getty
Show Hide image

Jeremy Corbyn has defied the odds and embarrassed his critics

The pundits were wrong, writes Liam Young. 

On Tuesday I said that Labour would need time to show any drastic improvement in nation-wide elections. With the results now clear I still hold to that premise. After a scary result in Scotland, a ‘holding on’ in Wales and a rather better than expected showing in England it is clear that the public has produced a mixed bag of results. But for Labour, something very interesting has happened.

Before the results were announced pundits were predicting roughly 200 seat losses for the Labour party across local councils. Some of Jeremy Corbyn’s strongest opponents suggested that Labour would lose councils in the South owing to the anti-austerity message being viewed as irrelevant. There was also the suggestion that Labour would gain votes in the heartland of the North where it already controlled a great number of seats. It seemed that the pundits were wrong on both counts.

One thing is clear and undeniable. Jeremy Corbyn’s Labour has defied the odds at this election. It looks like the party will lose no more than 30 council seats and that its vote share on 2015 will be up by roughly 4 per cent at the expense of the Tories. People will rightly say that this is depending on the standard the results are measured by.

But I think that John McDonnell made a convincing argument last night on exactly how to judge this performance. Given that many simply want to spend time speculating about Jeremy Corbyn’s leadership it seems entirely reasonable to measure Labour’s success based on the party’s movement since he became leader. As mentioned above if this is taken as the standard Labour has increased its share of the vote and has beat the Tories after being some 14 points behind in the polls just a few months ago.

Commentators were arguing even at the point of polls closing that Labour would lose control of key councils such as Southampton, Harlow, Carlisle and Nuneaton. Yes – everybody remembers Nuneaton. But these predictions proved false. Labour did not just hold on to these areas but in a great deal of them the party increased its share of the vote and indeed its share of council seats. Labour has truly defied the odds across England.

The information that was shared in the weeks before the election on Thursday suggested that with Labour’s current position in the polls it would lose 170 seats. Some went as far as to suggest we would lose towards the 300 mark given the crisis Labour found itself enveloped in during the run up to voting. Opponents were kind enough to note that if we achieved parity with the Tory vote we would only lose 120 council seats.

While any loss is regrettable I have made my view clear on why Labour faced an uphill climb in these elections. Despite the rhetoric we have lost just over 20 seats. I agree with John McDonnell’s call this morning that it is time for the ‘begrudgers’ to ‘put up or shut up’. No wonder they are being so quiet.

Liam Young is a commentator for the IndependentNew Statesman, Mirror and others.