London - A year ago, the US economy was slowing, stock
markets were spending the third quarter sinking and investors were looking to
the US Federal Reserve to do something.
Deja vu? Well, not quite. Although the big event of the
coming week is likely to be Fed chairperson Ben Bernanke's address at the
Jackson Hole central bank talk fest, he may be unable to say the kind of things
he did last year that helped send world stocks up as much as 45%.
It was at Jackson Hole in Wyoming last year that Bernanke
brought up the idea of the Fed's $600bn bond-buying programme that became known
as QE2. That pumped money and confidence into markets.
There are some who now hope to hear about a QE3,
particularly against a background of investment bank downgrades of US growth,
albeit with the traditional reluctance to predict a recession.
But the politics have got more complicated, with Texas
governor Rick Perry, a Republican candidate for president, raising the stakes
by saying he would consider it "treasonous" if Bernanke "prints
more money between now and the election" in 2012.
The Fed, typically, tries to keep a low profile in
presidential election years. Primary dealers set the chances of QE3 in the next
six months at less than 40% in a recent Reuters poll.
That may be one reason that investors have felt free to dump
riskier assets at a sometimes alarming rate this month. MSCI's all-country
world stock index has lost more than 13% over 15 trading days.
Those who believe a bear market is designated by an index
falling at least 20% from its most recent high will have noted that the MSCI
index hit that level earlier in August, bounced back a bit and then headed back
towards it again.
No surprise, really, that 10-year US Treasuries, downgraded
though they now are, have seen yields dip below 2% in a rush for safety.
It's the economy
There are plenty of reasons behind the summer plunge,
including the eurozone's serial failure to stop its debt crisis spreading - or
at least to stop debt market bears lurching from one indebted country to
Worries about European banks are likely to continue into the
But it is the weakening US economy that has really set the
ball rolling. The past week's plunge in the Philadelphia Federal Reserve's
index of business conditions has particularly rattled investors.
Karen Olney, head of European thematic research at UBS, says
markets are now pricing in a mild recession.
"When you start to see the United States, the global
engine of growth, (roll over) people do get worried about a whole different
thing," she said. "Much more attention will be turned on to the
The coming week offers a few markers for investors, including
July durable goods on Wednesday followed by the August consumer sentiment
survey and another look at second-quarter gross domestic product (GDP) figures
Europe, reeling from poor second-quarter growth data from
supposed powerhouse Germany, provides a first glimpse of how the economy is
faring this month with Tuesday's eurozone flash purchasing managers' report.
Take your choice
Investment banks, some of which have in the past had a
spotty record of predicting a recession, have started downgrading growth
But they are holding back from predicting contraction.
Morgan Stanley, for example, cut its global GDP forecast to
3.9% growth from 4.2% for 2011, and to 3.8% from 4.5% for 2012.
It said that the US and eurozone economies were close to
recession, but added that was not part of its base scenario.
JP Morgan said much the same about the US economy.
ING, meanwhile, said its traditional recession barometers
were "pointing to 'change' not 'storm'." The rub for many investors
is that there is little clarity about what they are facing. For every bullish
report saying stocks are cheap and a "buy", there is one predicting
something akin to the apocalypse.
The coming week probably won't offer much to change that.