Storm Alert: How September Could Shake Up Markets
"Europe is a drawn out water torture"
“You’ve also got the issuance calendar picking up again, which brings to question how well market access is going to be for countries, like Italy and Spain,” said Kasman.
Bond auctions are expected to be resumed by Italy and also Spain, which is discussing conditions for aid, but it will not make a request for help until the conditions are defined. Draghi has made clear any bailout would include supervision and conditions from the Troika but details remain to be seen.
Spain, a major concern for markets, is expected to unveil an audit of its banking sector by mid-September, determining how it would use the 100 billion euro bank bailout offer. On Friday, Spain's government said it approved a "bad bank" to hold the bad property assets, now held by banks.
France’s President Francois Hollande Thursday said it’s understandable that Spain wait for details on aid conditions before making a request. He also joined Spain and Italy in calling on the ECB to commit to intervening in the bond markets to reduce borrowing costs, getting perilously high for Spain.
Some German officials are not as receptive to the idea. Draghi, in a commentary in a German newspaper this week, pushed back at German criticism of his plan to intervene in the bond markets, saying the ECB “mandate sometime requires us to go beyond standard monetary policy tools.”
“If we continued to see push back from Northern European governments on the bailout of Greece and other southern Mediterranean economies, we could see a resumption of this year’s market declines,” said Sam Stovall, chief equity strategist at S&P Capital IQ.
The Fed meets Sept. 12 and 13, and it will release new economic forecasts after that meeting. Fed chairman Ben Bernanke holds a press briefing and there is all kinds of speculation about what the Fed might announce.
The Fed has made it clear it will act if necessary but the benefits must outweigh the cost of more easing. (Read More: Fed Easing Not 'Done Deal' but Markets in Rally Mode)
“We think the Fed will extend the guidance on rates to 2015,” said Kasman.
Many economists believe there’s a chance that the Fed announces another quantitative easingprogram (learn more), or asset purchases. The expectation, however, is that it is more likely later in the fall and that it could involve the purchase of Treasurys and mortgage-backed securities.
Kasman said the Fed may come up with a smaller scale $250 billion plan that runs through December, and some economists say the Fed might leave it open-ended.
Before the Fed meeting is the important Sept. 7 release of the U.S. August employment report, which is the last big data point for the Fed to consider, ahead of that meeting. It is also one of three final employment reports ahead of the U.S. election, and political analysts expect employment to be a big factor for voters.
Economists expect just under 120,000 jobs were created in August, after July’s 163,000 nonfarm payrollsshowed more jobs than the consensus forecast.
The Fed has made clear it is watching the economy’s progress, and some members don’t see a need for more easing yet, including St. Louis Fed President James Bullard. He pointed out that data has begun to get slightly better. Atlanta Fed President Dennis Lockhart said further easing is a “close call.”
“If we were to see deterioration from this point, let’s say a persistence of job growth numbers that were well below 100,000 per month, or see signs of disinflation that could signal the onset of deflation, then there wouldn’t be much of a question about policy," Lockhart told CNBC’s Steve Liesman.
“The way we’re looking at the Fed right now, the payroll number that comes out Sept. 7 is potentially important for the outcome,” Kasman said.
The Fed meets, as Republicans are making the institution and Chairman Bernanke a campaign issue. Both GOP candidate Mitt Romney and his running mate Rep. Paul Ryan, R-Wis. have said the Fed should not do more easing. Quantitative easing is aimed at lowering rates, but it also can lift stocks and commodities prices, as investors move into riskier assets.
Rhetoric on the economy and fiscal responsibility should get louder as the November election approaches. Democrats hold their convention in early September, after the GOP met in Tampa to nominate Mitt Romneyat the end of August.
Which party gets the White House and control of the Senate will determine how Congress deals with the “fiscal cliff” (learn more) after the election. The so-called cliff is the dual expiration of Bush-era tax cuts, and the $100 billion in automatic budget cuts that will start taking effect Jan. 1 if Congress doesn’t act. While the Democrats and Republicans disagree on taxes and spending cuts, neither likes the automatic spending cuts that are onerous and would take a bigger slice out of defense spending than other programs.
“I think Europe is a drawn out water torture, and the fiscal cliff is a fast ball we thought we could hit,” said Stovall. “The fiscal cliff is something that will affect us in fewer than six months, and could have a devastating impact. A lot of people believe cooler minds will prevail but the fiscal cliff could have a swifter and more devastating near term impact.”
Kasman said the fiscal cliff is already creating a drag on the economy, and will continue to do so next year as spending cuts go into effect, even if Congress agrees to deficit reduction.
China’s economy is also a major factor for markets, and its data, and stock market, continued to deteriorate this summer. (Read More: Will China Lend Battered Euro Zone a Helping Hand?)
“I think China leads the U.S. at times. I think we lead China at times. It is difficult being bullish of U.S. stocks when the Chinese stock market is making new lows and heading lower,” said Dennis Gartman, editor of the Gartman Letter. Gartman said he is “flat and nervous” U.S. stocks, heading into September.
“They can jam liquidity into the system. They can force things to happen that we can’t force over time,” he said of China. “They can turn things around if the need to over at least a short period of time, but I must tell you I’m very concerned.” Speaking on CNBC’s “Fast Money Half Time,” Gartman said he is worried about inventories piling up in China, including coal and textiles. “That’s not a good sign.” (Read More: China to Lead US Into Bear Market—Traders)
Sinche said he’s watching Chinese data releases, after the report this week of leading indicators showed the lowest level since January, 2009. “Next week, the first week of September, we’re going to get the PMIs. By the second week, we get the regular regime of CPI, industrial production, retail sales and trade between the (September) 8th and 10th and that’s the key there,” he said.
September is the worst month for stocks, with more losses than gains. Traders and analysts are predicting turbulence as the market copes with the macro headlines of September, yet there is also a camp that sees reasons why stocks could move higher.
“Our technical analysts believes we could see consolidation down to 1390 to 1370. From a technical perspective that would be a good buying zone. From a fundamental perspective, I think there’s too many uncertainties,” Stovall said.
Stovall said the average price change in the S&P since 1945 is a decline of 0.65 percent in Septembers. The best September was in 2010, the year Bernanke spoke about quantitative easing at the Jackson Hole symposium, ahead of the launch of “QE2.”
“September is by far the worst month,” said Stovall. “At the same time, we are in the sweet spot, or at least the favorable half of the election year. Since 1900, close to 80 percent of all stock market lows during an election year occurred in the first half, and 85 percent of all highs occurred in the second half, and 70 percent occurred in the fourth quarter.”
Some Key Dates in September:
Sept. 4-6: Democratic Convention, Charlotte, NC
Sept. 6: ECB meeting
Sept. 7: U.S. August employment report
Sept. 8-9: 24th annual Asia-Pacific Economic Cooperation forum leaders summit, in Vladivostok, Russia
Sept. 12: Dutch election, German Constitutional Court ruling on ESM, Fed starts 2-day meeting
Sept. 13: Fed announcement, Bernanke press briefing
Sept. 14-15: Eurogroup finance ministers meet in Cyprus
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