Stock Market Catalysts for September

SEPTEMBER AHEAD: Will the Stock Market Undertake Erosion?

Catalysts to Encounter: How September Could Shake Up Markets!

by Ian Harvey

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September 03, 2012

Introduction

September is often a bad month for stocks, and an unusually heavy calendar of major events this year could ramp up volatility even more after a quiet late August.

Markets are looking for answers on three major fronts in September:-

• Can European leaders and policy makers put into action the promises made this summer for dealing with the debt crisis?

• Will the next batch of data show China’s economy getting better or worse?

• And, will the sputtering U.S. economy get another dose of monetary stimulus?

All of this comes against the backdrop of a very close U.S. presidential election that could determine the country’s fiscal path for years to come.

It is very likely that we will see progress, in particular on the European front, and that it continues down the path prioritizing the sovereign debt crisis -- but still nothing new will emerge to completely resolve the situation -- so there will be still plenty of stock market roller-coasting in the near future!

Central Banks and Their Influence in September on the Stock Market

The stock market was particularly quiet in late August with investors waiting for the onslaught of major events due in September, a month expected to bring much more trading volume and activity.

Central bankers will play a leading role in September in both Europe and the U.S., after just their hints of more monetary easing kept stocks aloft during the summer months.

There is a meeting of the 'European Central Bank - ECB' Sept. 6, and the stock market is looking to see whether it will cut rates or more importantly discuss purchasing sovereign debt, following ECB President Mario Draghi comment that the ECB would do ”whatever it takes” to defend the euro.

Draghi pledged to buy Spanish and Italian bonds at the short end one month ago, and now the stock market hopes to see him add details around those comments and other “non-standard” forms of easing.

Then, there’s a key Federal Reserve meeting mid-month that could determine whether the Fed will conduct a new round of easing this fall. Fed Chairman Ben Bernanke, in his Jackson Hole speech Friday, again said the Fed could do another round of easing, if necessary, giving the stock market fresh commentary to consider as the September meeting approaches.

It maybe that some more clarity will be forthcoming on the ECB’s front in terms of what role it’s going to play as a liquidity backstop for sovereigns, which is probably the most important policy event in regard to Europe.

The Euro Zone for September

There are a number of critical events affecting the euro zone, which will bring Europe back to the forefront for the stock market that has largely ignored it during August.

On Sept. 12, a German Constitutional court will decide whether the European bailout fund, the ’European Stability Mechanism – ESM’, is legal. The ESM is the new bailout fund to succeed the EFSF.

That same day Dutch voters go to the polls, and there is concern the election will favor candidates who oppose budget cuts or favor exiting the euro.

The European Commission is expected to have a proposal on a banking union by Sept. 11, ahead of the EU leader’s summit in December. The ECB is expected to then have the supervisory role, and the ESM, if Germany’s court backs it, could then be used to recapitalize European banks.

The Eurogroup finance ministers meet in Cyprus Sept. 14 and their focus is likely to be on the ECB and the bailout funds.

The month of September could also be a turning point for Greece and the way Europe handles its bailouts.

The so-called “troika” — EC, ECB and IMF — is working with Greece on an adjustment plan. Greece is seeking more time to push through austerity measures tied to its bailout agreement, and the troika is expected to have a report on Greece by the end of September or early October.

The general meaning of the Russian word troika (Russian: тройка) is three of a kind, a collection of three or simply the number three.

In this situation “troika” is a slang term for the three organizations which have the most power over Greece's financial future - or at least that future as it is defined within the European Union. The three groups are the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB).

Germany and France so far refuse to extend the time frame, and Athens is scrambling to make cuts. The troika will be assessing whether Greece will ever be able to get out from under its onerous debt burden, weighing whether Greece’s debt as a portion of GDP can be brought below 120 percent by 2020, from the current 160 percent.

Bond auctions are expected to be resumed by Italy and also Spain, which is discussing conditions for aid, but it, will not make a request for help until the conditions are defined. Draghi has made clear any bailout would include supervision and conditions from the Troika but details remain to be seen.

Spain, a major concern for the stock market, is expected to unveil an audit of its banking sector by mid-September, determining how it would use the 100 billion euro bank bailout offer. On Friday last, Spain's government said it approved a "bad bank" to hold the bad property assets, now held by banks.

France’s President Francois Hollande Thursday last said it’s understandable that Spain wait for details on aid conditions before making a request. He also joined Spain and Italy in calling on the ECB to commit to intervening in the bond markets to reduce borrowing costs, getting perilously high for Spain.

Some German officials are not as receptive to the idea. Draghi, in a commentary in a German newspaper last week, pushed back at German criticism of his plan to intervene in the bond markets, saying the ECB “mandate sometime requires us to go beyond standard monetary policy tools.”

The Fed In September

The Fed meets Sept. 12 and 13, and it will release new economic forecasts after that meeting. Fed chairman Ben Bernanke holds a press briefing and there are all kinds of speculation about what the Fed might announce.

The Fed has made it clear it will act if necessary but the benefits must outweigh the cost of more easing.

Many economists believe there’s a chance that the Fed announces another quantitative easing program, or asset purchases. The expectation, however, is that it is more likely later in the fall and that it could involve the purchase of Treasurys and mortgage-backed securities.

Before the Fed meeting is the important Sept. 7 release of the U.S. August employment report, which is the last big data point for the Fed to consider, ahead of that meeting. It is also one of three final employment reports ahead of the U.S. election, and political analysts expect employment to be a big factor for voters.

Economists expect just under 120,000 jobs were created in August, after July’s 163,000 nonfarm payrolls showed more jobs than the consensus forecast.

The Fed has made clear it is watching the economy’s progress, and some members don’t see a need for more easing yet, including St. Louis Fed President James Bullard. He pointed out that data has begun to get slightly better. Atlanta Fed President Dennis Lockhart said further easing is a “close call.”

The Fed meets, as Republicans are making the institution and Chairman Bernanke a campaign issue. Both GOP candidate Mitt Romney and his running mate Rep. Paul Ryan, R-Wis. has said the Fed should not do more easing. Quantitative easing is aimed at lowering rates, but it also can lift stocks and commodities prices, as investors move into riskier assets.

Rhetoric on the economy and fiscal responsibility should get louder as the November election approaches. Democrats hold their convention in early September, after the GOP met in Tampa to nominate Mitt Romney at the end of August.

Which party gets the White House and control of the Senate will determine how Congress deals with the ”fiscal cliff” after the election. The so-called cliff is the dual expiration of Bush-era tax cuts, and the $100 billion in automatic budget cuts that will start taking effect Jan. 1 if Congress doesn’t act. While the Democrats and Republicans disagree on taxes and spending cuts, neither likes the automatic spending cuts that are onerous and would take a bigger slice out of defense spending than other programs.

The Effects of the China Syndrome

China’s economy is also a major factor for the stock market and its data, as it continued to deteriorate this summer.

It is difficult being bullish of U.S. stocks when the Chinese stock market is making new lows and heading lower.

China can jam liquidity into the system and force things to happen that the U.S. can’t force over time. Investors should keep a watchful eye on Chinese data releases, particularly after the report last week of leading indicators showed the lowest level since January, 2009. This week, the first week of September, we’re going to get the PMIs. By the second week, we get the regular regime of CPI, industrial production, retail sales and trade between the (September) 8th and 10th and that’s an important key in regard to future market development.

September – Worst Month for Stocks?

September is the worst month for stocks, with more losses than gains. Traders and analysts are predicting turbulence as the market copes with the macro headlines of September, yet there is also a camp that sees reasons why stocks could move higher.

The average price change in the S&P since 1945 is a decline of 0.65 percent in Septembers. The best September was in 2010, the year Bernanke spoke about quantitative easing at the Jackson Hole symposium, ahead of the launch of “QE2.

Even though September is by far the worst month at the same time, we are in the sweet spot, or at least the favorable half of the election year. Since 1900, close to 80 percent of all stock market lows during an election year occurred in the first half, and 85 percent of all highs occurred in the second half, and 70 percent occurred in the fourth quarter.

Some Major Key Dates in September that may Effect the Stock Market:-

Sept. 4-6: Democratic Convention, Charlotte, NC

Sept. 6: ECB meeting

Sept. 7: U.S. August employment report

Sept. 8-9: 24th annual Asia-Pacific Economic Cooperation forum leaders summit, in Vladivostok, Russia

Sept. 12: Dutch election, German Constitutional Court ruling on ESM, Fed starts 2-day meeting

Sept. 13: Fed announcement, Bernanke press briefing

Sept. 14-15: Eurogroup finance ministers meet in Cyprus


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