September – the cruellest month?

James Qualtrough | September 5, 2012 | 0 Comments

Derry Pickford, Macro analyst at Ashburton on what September 2012 might have in store for us.

“Since 1896, for example, when the Dow Jones Industrial Average (US:DJIA) was created, the Dow has lost an average of 1.07% in September. The average gain for all other months is 0.71%. That spread of 1.78 percentage points is statistically significant at the 95% confidence level that statisticians often use to determine if a pattern is most likely genuine.” Wall Street Journal, September 2011.

Pickford says: “So far we have kicked off to a disappointing start in Europe and China. With further economic data out this week, continued weakness will make action likely when the FOMC meets on the 12th and 13th. An extension in ZIRP (zero interest rate policy) guidance is the most probable policy action. This will be the first month that 2015 projections will be published and a change here was strongly hinted at in the last minutes. There is a decent probability that the Fed opts for further asset purchases (QE). If it does, open-ended, flexible MBS purchases seem the most likely course of action.

“There is a danger that the FOMC could be overshadowed by events in Europe. On the 12th we have elections in Holland and the German Constitutional Court’s ruling on the legality of the ESM. Although most expert opinion seems to suggest that the Court is more likely to allow it than not, there is enormous disagreement on the likelihood of a “surprise” ruling. Although an outright rejection may be unlikely, there is a danger that resolution of this issue may be postponed, with demands for a referendum, parliamentary or judicial oversight all possible.

“This Thursday the ECB policy meeting should provide some more detail on the asset purchase programme (this is conditional on EFSF/ESM being triggered; the Bundesbank have been pushing hard in the last few weeks to ensure that the scheme doesn’t weaken incentives for ‘fiscal reform’). A slight majority of economists are forecasting a 25bp cut in the refi rate. This would narrow further the interest corridor, unless the deposit rate moves into negative territory. A negative deposit rate is possible, but such an unconventional move is likely to be flagged beforehand, so seems unlikely for now. On the same day the Spanish PM, Rajoy, meets Chancellor Merkel. There is speculation that the terms of an EFSF bail-out for Spain will be negotiated and, whatever happens, the rumour mill will be in overtime. The Spanish cabinet then meet the next day. If we do get an EFSF programme for Spain we think this will be seen as a positive by the market, although the Eurogroup/Ecofin meeting the following week is a more likely announcement point.

“The month could end with the possible publication of the Troika report on Greece, although yet another postponement wouldn’t surprise us. The French budget also comes out at the end of the month. So far France has avoided being perceived as having the same kind of unstable dynamics as the periphery. The budget will need to be tight if France is to stay firmly entrenched in the core.”

Pickford adds: “Whether the September effect is a genuine feature of returns or not, there are enough events this month to make it likely that markets are more volatile than they have been this summer.”