Equity Indices reliant on Central Bank Action

LIKE a petulant schoolchild, it’s about this time in the summer holidays when the equity markets run out of steam and sit around lethargically complaining of boredom. Yesterday was a slow trading day, with all exchanges seeing their lowest volumes of 2012 so far.

“With most of the FTSE 100 biggies having reported already, any company news is going to be very limited in the short term,” says Michael van Dulken, head of research at Accendo Markets. “If there was anything good to report, then it would surely have been shoe-horned into results to try to sweeten things up and maintain share price momentum.” With this lack of company data being released, only the central banks seem to be able to get markets’ attention.

The FTSE didn’t find much direction until the US open yesterday, with trading thin and flat. But when the US session opened, it was a negative hit as Wall Street reacted badly to the weak data coming in from Japan overnight. The Bank of Japan reported that the country had missed its GDP estimates – the news compounded the effects on the market caused by the soft macro data coming out of China last week.

Japan’s GDP print came in at just a 0.3 increase in the second quarter, a sharp drop off from the 1.3 per cent first quarter rise. The Japanese drop off compounded worries about the effects of the European debt crisis and its drag on worldwide demand. The FTSE lost 0.26 per cent, or 15 points, to close at 5,832 and the FTSE Mid 250 lost 0.3 per cent, or 34 points, to close at 11,437.

With such low volumes and lack of company reporting, the main focus remains on expectations of a stimulus measure from one or more of the central banks – whether that’s in the form of quantitative easing from the Fed, a loosening of monetary policy from the People’s Bank of China or a bond purchase program from the European Central Bank (ECB).

With Ben Bernanke, the US Fed chairman, not addressing Jackson Hole – the Federal Reserve Bank of Kansas City’s annual economic policy symposium – for another three weeks, for now the main attention is going to be on the politics of the ECB. A flash estimate of Greek growth yesterday showed a smaller drop in Greek growth than expected – down 6.2 per cent rather than the estimated 7 per cent. Also, the Italian 12-month bill auction went smoothly. Although it drew higher yields, it saw higher demand than the last offering, with a bid-to-cover ratio of 1.69. But that these two events were seen as a positive is sign of the dire state of European economies. And with growing speculation of German Chancellor Angela Merkel’s opposition to the idea of bond buying from the European Central Bank, all eyes will be on Germany’s consumer price index-based inflation figures due out today.

Though the fundamentals of individual stocks will always be important, in these low volume conditions, it’s the macro data that’s going to move markets. Traders should keep an eye on the technicals and central banks – particularly, in the short term, for news of whether the Germans decide to block ECB bond buying.