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When Will the Dust Settle?

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Friday, June 21, 2013

The positive sentiment is indicative of some sort of a rebound in the stock market today, after two days of heavy Fed inspired losses. But the favorable momentum at the open may not have much staying power even though overnight trading action out of Asia and Europe was a lot calmer. There is nothing on the economic calendar, but we would have had the typically unusual trading patterns due to quadruple witching even without the Fed related issues.

The short-term funding issue in the Chinese banking sector appears to have eased a bit, for now at least, following reports that the Chinese central bank advised state banks to be more accommodative to funding requests. As a result, benchmark borrowing costs in the interbank market came down on Friday from the unusually elevated levels the day before. But they still remain high and could go up again next week as the typical end-of-the quarter funding needs increase.

There are reports that the lack of a concerted move by the central bank is due to its desire to shake out the shadow banking sector, which is believed to have become a big player in the country’s financial sector. We will see how the issue unfolds next week, but this interbank funding issue adds to the growth questions about China that the markets were already trying to grapple with.

Today's positive momentum in the market notwithstanding, the Fed’s changed stance is prompting investors to reassess their outlook for stocks and other asset classes. The central bank’s greater confidence in the economy is a net positive in the longer run. But we have to acknowledge that Fed liquidity inspired gains may need to be given back, particularly given the backdrop of rising interest rates and a less than inspiring corporate earnings picture. We are just weeks away from the thick of the 2013 Q2 earnings season, but the early reports from such bellwethers as FedEx (
(FDX - Free Report) ) and Oracle ((ORCL - Free Report) ) don’t paint a good enough picture.

Earnings aren’t terrible, but they are not in-sync with a stock market that was making new all-time highs on a daily basis a few short weeks back. The market needs to squeeze out the QE inspired excesses in the coming days. That cleansing process has gotten underway with the Fed announcement this week. Stocks are undoubtedly the place to be once the dust settles. But a positive move in the market today is no evidence that the dust has settled already – it has not. We are in for a bumpy ride this summer.

Sheraz Mian
Director of Research


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