Yes, folks that’s it. While much of Europe has sweltered with record temperatures, the summer is nearly over in the UK as the mercury are already falling fast in the run-up to the August Bank Holiday.
And what a summer it has been. Highlights included the latest Greek farce of June and early July, followed by the massive fluctuations in Chinese stocks and oil in August.
The fact that UK is off on Monday means the month will come to an end with a bit of a whimper, but that gives us an opportunity to contemplate what might happen as the nights start to draw in over the autumn and early winter.
Clearly the most pressing matter is the FOMC meeting on September 16/17. Will the Fed pull the trigger or not?
Fed funds are still pricing in a 20% possibility that they will, so there is a small chance and some are advocating a 25bp hike to give the Fed some ammo should they need to tighten if the worse comes to the worse.
I don’t think so, though. Market volatility has created significant uncertainty on the global outlook even if the US economy continues to improve. And Fed chair Janet Yellen and co may well want to see how that pans out over the next couple of months, especially the effect of the oil price on inflation.
So lift-off expectations are pushed back to the October meeting, or more likely December. One could even argue that this may only take place next year.
This is when the UK is likely to see lift-off, with the market not fully pricing in a move until June, and that would seem about right. The split in the MPC may increase over the next few months, though, and do not be surprised to see a 6-3 or even 5-4 vote by the end of the year.
What about the other central banks? Well, all eyes are on what the PBoC will do next. It seems inconceivable that the stock market travails are over, and hence we cannot rule out more cuts to the RRR and lending rates and also more liquidity injections.
In Europe, the ECB is still waiting to see how the QE programme is boosting the economy. If the recent PMI and inflation numbers are anything to go by, they may well be waiting until the end of the year to get any answers. So will Mario Draghi and co just sit on their hands in the next few meetings or will they up the ante and step up bond buying. My head says it will be the former. My gut says it probably should be the latter.
Aside from the central banks, one would expect that commodity volatility will continue to rule the roost for some months to come. But where will the markets be by Christmas?
In terms of stocks and credit, the sell-off seen last week and on Monday would look on paper to be a decent shake-out of long positions, and that should allow a base to form, resulting in a rally into year-end.
The only problem is that it came at a time of the year when a lot of players were sitting on a beach, oblivious of the carnage in the office. So treat this shake-out with a pinch of salt. History tells us that October is a bad month for stocks, and I would not be surprised if that were the case again. A proper shake-out then, could well prove to be the platform for a year-end rally.
In rates, much depends on the Fed. But even if they go in September, one suspects there will be a knee-jerk sell-off before Treasuries and Bunds slip back into the - admittedly wide - ranges we have seen over the course of the summer.
And so on to oil. Well, with Brent down at 6.5-year low on Monday, you could well argue that the US$40 level in Brent was a good place to back up the truck and get a few barrels on board, which would have worked nicely after yesterday’s rally. Again, though, one suspects that it will be about trading a wide range between 40 and 65. Any break of either level will have far reaching consequences on all other markets.
To close I shall return to Greece. Just because we have had a third bailout, do not think it is all over yet. With autumn elections on the cards, and the winner likely to be voted in on an anti-austerity agenda, who will be surprised if the bailout conditions were not met? Could we be back to where we were earlier in the year by December? Roll on Christmas.
