Good morning,

Markets are called lower this morning before the Fed meeting. This is what's happening today:

  • Japan’s retail sales fell more than estimated in July;
  • U.S. data yesterday dimmed expectations Federal Reserve Chairman Ben S. Bernanke will immediately announce a third round of quantitative easing during a speech in Jackson Hole, Wyoming tomorrow;
  • The S&P 500 Index snapped a two-day drop yesterday after a government report showed the U.S. economy expanded at a 1.7% annual rate from April through June, up from an initial estimate of 1.5%;
  • 10 year Italian debt is yielding 5.756%, 10-year Spanish debt is yielding 6.435% and 10-year Portuguese debt is yielding 9.275%;
  • Apple closed the session at $673.47;

For those who read the blog yesterday they could have predicted the reaction of investors in the markets today. The negativity we are seeing in the markets is based on the assumption that since GDP data came out better than expected from April-June '12 in the US, it is more likely than not that the Fed will not announce any form of quantitative easing at this point in time. The Fed is trying to delay QE3 till after the elections and the positive data is helping to do this. The market keeps on calling for QE but it fails to appreciate the fact that QE is not an option for the Fed till after the elections. The American's are in a sensitive situation right now before elections in November and the Fed does not want to take positions and favor one candidate over another.

Obviously this assumption of no easing is driving the markets lower because the rally we have seen in the markets over the last couple of weeks was based on optimism of further easing in the US, China and hopefully Europe. Let's put the US on the back burner for now because at the end of the day, delaying QE for an obvious reason and keeping in mind that data is coming out better than expected is not exactly the end of the world. Investors have much bigger problems to worry about such as Europe. The DAX is up 18.86% for the year and the CAC 8.04%. We have seen a recovery in the markets not based on facts but on optimism that the governments around the world will do more to help the cause. However, history has thought us that politicians promise alot of things but deliver on only a few of the promises. A lack of QE from the Fed will set a negative tone in the markets before the ECB meeting next week. Even in Europe, don't expect anything that will surprise the market in a positive way. Draghi's hands are tied and although it looked like this ECB president will do much more than Trichet did to get Europe out of this mess, the truth it they are both bound by the same objective and mandate than limits what the ECB can do to get Europe out of this mess. The problem Europe has is not something that will be solved overnight. It has taken years and we are still in a situation where we have no solution. And in my opinion it will remain so for many years to come.

But it is not all doom on gloom. Life goes on and the situation will improve in Europe although at a very slow pace. This is why investors need to appreciate that although US corporates are more expensive than their European peers, there is a good reason for this. Watch out for the EURUSD today because all those who were banking on a stronger Euro are bound to be left disappointed after we hear it from the horse's mouth that there won't be any easing in the US. Different houses are of the same view. The Euro has rallied to a level which is unsustainable and it is only a matter of time before we see the Dollar strengthen again. And this makes sense. We won't have QE in the US till the beginning of next year so no need to rush out of the Dollar. Plus US corporates are reporting good results and the US economy is improving even though at a slow pace. On the other hand we have Europe which is in recession and many important economies like France which are expected to fall into recession this quarter. We still have the problem of Spain and Greece which people are not talking about at the moment because they shifted their focus to international governments, but the problems remain. Citi are still of the view that there is a 90% probability that Greece will exit the Eurozone within the next 18 months.

So don't rush out of the Dollar just because you are seeing some optimism in Europe. If the optimism is based by facts it is one thing, but the reality is the optimism we are seeing in the markets is based on expectations and this is very dangerous knowing from beforehand how governments and politicians have acted in the past.

The UK, US and Emerging Markets are offer a better outlook than Europe does. Adding alpha by picking European stocks which are multinationals is a good thing to do but do keep in mind that the situation in Europe is still messy and it is still not time to move out of US corporate which offer excellent dividend yield and growth prospects.

Stock to watch: WPP Group (Price 831.50p, Price Target 960p)

WPP is a globally diversified agency holding company that offers exposure to the structural shift in advertising budgets from traditional to non-traditional formats, and the development of faster-growth geographic markets (Asia, Central & Eastern Europe, Latin America). Earnings growth is additionally enhanced by margin expansion and selective acquisitions. We regard WPP as a balanced way of playing eventual advertising recovery, with flexible staff costs supporting margin upside, and underpinning above-sector-average EPS growth. We rate the shares a Buy.

For further information on WPP or other stocks and bonds we follow, contact our offices on 25688688. PLEASE NOTE THAT THE BLOG WILL BE BACK ON 25TH SEPTEMBER 2012.

Good day and happy trading!

Kristian Camenzuli