Busch: Don’t Overread August

When I said I thought equities would cool after the Fed decision, I didn’t think they would drop over 2.5% the next day! This is the problem with August and why I was worried about a return of a “Flash Crash” due to low liquidity. Volumes are smaller and movements more extreme in usually a range. This time of year makes everyone nervous.

It’s interesting that the Fed’s actionswere interpreted in the way I was warning: what do you got left? In the theme of an uncertain world, the Fed has now just added more to it. On July 21st, Ben Bernanke spent most of his testimony to Congress describing how the Fed would exit the quantitative easing not expand it. How can the Fed pivot this quickly is underscoring Bernanke’s admission “unusually uncertain” economic outlook.

Ben Bernanke, Federal Reserve Chairman
Ben Bernanke, Federal Reserve Chairman

As far as the rolling over QE aspect is concerned, the Fed had already told us what they were going to do last week when they leaked it to the WSJ and Jon Hilsenrath (in his article on Wednesday).

This meant we had this as a mitigating factor for Friday when the weak NFP came out. The problem is that the newsflow since has been consistently negative with the theme weakening global economic growth. Every report is now being viewed through this lens.

We now have our summer ranges: S&P 1050-1130, Euro 1.25-1.33. Markets are rarely this simple as bonds don’t look as rangy as they continue to drive yields lower and the Japanese yen follows. For now, the “Deflationistas” and “New Normalists” are in temporary favor. My 15 negatives are outweighing the 15 positives. I expect this volatility to continue until mid-September.

I don’t subscribe to the “Meltdown” theory for the markets as credit continues to improve. Slower economic growth is a reality and this is being priced into the markets this week. August is a great time for vacation and not much more……

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.