Storm Alert: How September Could Shake Up Markets
September is often a bad month for stocks, and an unusually heavy calendar of major events this year could ramp up volatility even more after a quiet late August.
Markets are looking for answers on three big fronts in September.
Can European leaders and policy makers put into action the promises made this summer for dealing with the debt crisis? Will the next batch of data show China’s economy getting better or worse? And, will the sputtering U.S. economy get another dose of monetary stimulus?
All of this comes against the backdrop of a very close U.S. presidential electionthat could determine the country’s fiscal path for years to come. (Read More: After Slow Summer, Market Will Heat Up in September)
“My gut is we will see progress, in particular on the European front, and that it continues down the path of triaging the sovereign debt crisis (learn more) but still nothing new that has it recede completely,” said Janney Montgomery chief investment strategist Mark Luschini. “So there’s still the opportunity for a market riot before it’s all said and done.”
Luschini said the market was particularly quiet in late August because of the onslaught of major events in September, a month expected to bring much more trading volume and activity.
Central bankers will play a leading role in September in both Europe and the U.S., after just their hints of more monetary easing kept stocks aloftduring the summer months.
There is a meeting of the European Central Bank Sept. 6, and the market is looking to see whether it will cut rates or more importantly discuss purchasing sovereign debt, following ECB President Mario Draghi comment that the ECB would do whatever it takesto defend the euro.
Draghi pledged to buy Spanish and Italian bonds at the short end one month ago, and now the market hopes to see him add details around those comments and other “non-standard” forms of easing.
Then, there’s a key Federal Reserve (learn more) meeting mid-month that could determine whether the Fed will conduct a new round of easing this fall. Fed Chairman Ben Bernanke, in his Jackson Hole speech Friday, again said the Fed could do another round of easing, if necessary, giving the market fresh commentary to consider as the September meeting approaches.
(Confronting the Crisis: Tune in all day Thursday and Friday to CNBC for coverage on the Fed at Jackson Hole. )
“I think what we’re expecting is to see more clarity on the ECB’s front in terms of what role it’s going to play as a liquidity backstop for sovereigns,” said Bruce Kasman, chief economist at JPMorgan. “That’s probably the most important policy event we’re looking for in Europe. I think there’s more sort of fuzzy issues around what governments agree on the bank side.”
There are a number of critical events affecting the euro zone, which will bring Europe back to the forefront for markets that have largely ignored it during August.
On Sept. 12, a German Constitutional court will decide whether the European bailout fund, the European Stability Mechanism, is legal. The ESM is the new bailout fund to succeed the EFSF. (Read More: The Definitive ‘Game-Changer’ in the Euro Zone?)
That same day Dutch voters go to the polls, and there is concern the election will favor candidates who oppose budget cuts or favor exiting the euro.
The European Commission is expected to have a proposal on a banking union by Sept. 11, ahead of the EU leader’s summit in December. The ECB is expected to then have the supervisory role, and the ESM, if Germany’s court backs it, could then be used to recapitalize European banks.
The Eurogroup finance ministers meet in Cyprus Sept. 14 and their focus is likely to be on the ECB and the bailout funds.
The month of September could also be a turning point for Greece and the way Europe handles its bailouts.
The so-called “troika”—EC, ECB and IMF—is working with Greece on an adjustment plan. Greece is seeking more time to push through austerity measures tied to its bailout agreement, and the troika is expected to have a report on Greece by the end of September or early October.
Germany and France so far refuse to extend the time frame, and Athens is scrambling to make cuts. The troika will be assessing whether Greece will ever be able to get out from under its onerous debt burden, weighing whether Greece’s debt as a portion of GDP (learn more) can be brought below 120 percent by 2020, from the current 160 percent.
“We have a lot of sequencing problems here. It’s great to look at an event by itself and draw some conclusions from it, but it’s different to look at the event in the context of other events around it,” said Robert Sinche, global head of currency strategy at RBS. “Yes, the ECB would like to do something on the sixth (of September) but will they do it ahead of the German court on the 12th?”
“Maybe what they do is review it, and talk about what they're likely to do, assuming the ESM works alongside them. I think they can do things on collateral. We doubt they move on rates,” he said.
Some ECB watchers expect the central bank to cut its refi rate by 0.25 percent to 0.50 percent. Sinche said the ECB could tweak what type of debt is allowed to be used as bank collateral.