Afternoon Market Update: Paralysis Edition

December 14th, 2012 by

Equities and precious metals both were constrained in light trading today in New York, as hope of a fiscal cliff deal began to be replaced by dread, and uncertainties grew over the new quantitative easing program by Fed.

The Fed’s “Evans Rule,” which was supposed to reassure markets, has instead turned them upside down in the face of improving economic signs. Previous quantitative easing by the Fed was tied to deadlines. It was thought that industry was afraid to make capital expenditures because no one knew if the stimulus would continue after “X” date. The Evans Rule, adopted this week upon the announcement of outright bond buying and continued purchases of mortgage-backed securities, was intended to assure markets that the Fed was dedicated to quantitative easing until conditions improved. It seems now that Wall St. preferred the deadlines instead (at least until economic indicators drop,) as traders are afraid that the $85 billion a month the Fed is pumping into the economy may end earlier than later.

The big factor in the market’s paralysis today was the appearance that there will be no grand agreement on the fiscal cliff negotiations; rather, we will see some band-aids to get us over New Years, with continued wrangling through January. Combined with the normal selling in December as firms square away accounts for the year, the uncertainty of the tax repercussions of any financial move has convinced most traders to go ahead and sit on the sidelines through the holidays.

Expect volume to be thin next week, as it will be the last full week of trading before the holidays. No large influence on the market is expected, unless the politicians surprise us with a fiscal cliff deal.  This lighter than usual volume will amplify any concerted effort to swing the market by tripping stops, as we saw in this week’s “China Bomb” during light Asian trading. Forewarned is forearmed.

Looking forward, the implementation of the Basel III banking accords will have upward pressure on gold, as it is now included as a Tier 1 asset equivalent to cash. This will cause more purchases by central banks, especially those in smaller countries that only have a tiny fraction of their reserves in bullion. The timetable for this will depend on the individual nations, though it seems that only Thailand has dedicated itself to the January 1 deadline to begin implementation. Banks will have six years to become compliant to all phases of Basel III.

by David Peterson