These are stories Report on Business is following Wednesday, Oct. 29, 2014.
Markets await Fed
To borrow from Jerry Garcia and the Grateful Dead, what a long strange trip it's been for the Federal Reserve.
Six years after the collapse of Lehman Bros. and the onset of the financial crisis, the U.S. central bank is poised today to wrap up a stimulus program known as quantitative easing, or QE3 to mark the third round, when it releases its policy statement this afternoon.
The Fed has been gradually cutting back on the amount of asset purchases it makes each month under the controversial program. Once valued at $85-billion (U.S.) a month, it's now down to just $15-billion, and that's expected to end today.
The central bank, though, is expected to take pains to ease market jitters that arise every time Fed stimulus is brought into question.
While QE is expected to end, and the Fed's benchmark interest rate won't move from effectively zero, markets will be closely watching the language in the 2 p.m. (ET) statement from the Federal Open Market Committee, or FOMC, the policy-setting panel.
In particular, investors will be looking for the promise that rates will remain at rock bottom for a "considerable time" after QE ends.
And this time, there's no scheduled post-statement news conference, which means Fed chair Janet Yellen won't be speaking, and what you see is what you get.
Keep an eye, too, on the U.S. and Canadian dollars, the latter of which is closing in on the 90-cent mark today.
"We expect an end to QE and a cautious tone that links the expectations for interest rate hikes to upcoming data releases; this is well priced into markets, however there is some risk for a brief [U.S. dollar] rally late today," said chief currency strategist Camilla Sutton of Bank of Nova Scotia.
Here's what some observers are watching for:
"You could be forgiven for thinking that the Fed is not about to end QE today. The reaction in markets has not exactly been what many predicted, with investors apparently sanguine about the prospect of life without regular bond purchases by the U.S. central bank. It is the commitment to low interest rates that is maintaining calm, and expectations are for a dovish Fed decision that will assuage fears about a premature rate hike." Brenda Kelly, IG
"On any measure, there has been a sea change in expectations for Fed policy over the course of the last month. Forward rates markets have pushed the expected timing of the first Fed hike three months further into the future, the first material shift in market expectations for U.S. policy rates for a year. Ahead of the September FOMC meeting, 50 per cent of analysts expected the Fed to drop the 'considerable time' reference immediately, and those that did not mostly expected it to go at this meeting. Now, 80 per cent of analysts expect the reference to remain unchanged in today's statement … and almost none expect it to be dropped altogether. Against this background, it is not easy to see how the statement can 'out-dove' such dovish expectations and we see the short-term risks skewed to a positive [U.S. dollar] reaction." Adam Cole, Royal Bank of Canada
"We're also seeing evidence that people are anticipating a more dovish Fed in response to the slowdown in the euro zone and the disinflation that has been gripping many of the major economies. A survey compiled by CNBC showed that market participants are already scaling back their rate hike expectations to July, from June previously. There's also been a lot of suggestions that it could be put back further to the end of next year, while some have even speculated about the potential for QE4 even with QE3 only expected to come to an end this month. These expectations are far more dovish than what we had a couple of months ago before that sell-off in the markets knocked everyone's confidence. If they're correct though, this is positive for the markets and could help them push beyond the current highs if confirmed by the Fed." Craig Erlam, Alpari
"It would appear … that markets are in essence banking on the prospect that the Federal Reserve will do everything in its power to anchor interest rate expectations at, or below, current levels, hence last night's strong finish for U.S. markets … It remains unlikely that the Fed will deviate from its timetable of pulling back from its bond buying program. We can therefore expect the Fed to call time on the remaining $15-billion of monthly bond buys, but in an attempt to push out interest rate expectations it will probably leave the language of the statement unchanged, leaving intact the key phrase to keep interest rates low for 'a considerable amount of time.' Any attempt to alter the language in anything other than a dovish fashion could well see markets take fright." Michael Hewson, CMC Markets
- Joanna Slater: Cruellest months come and gone, for QE3 the job is done
- Sweden's credit bubble a 'test case' for Canada
- Barrie McKenna: Bank of Canada cites oil price, hot housing market as factors roiling rate decisions
What's not to like?
Shares of Facebook Inc. are tumbling today after the social media company's third-quarter report late yesterday.
Facebook actually posted decent third-quarter results after markets closed yesterday, though investors appear to be fretting over projected slower revenue gains and forecast higher spending.
Facebook profit climbed in the third quarter to $806-million (U.S.), or 30 cents a share, diluted, from $425-million or 17 cents a year earlier, while revenue jumped to $3.2-billion from about $2-billion.
"It seems earnings expectations have reached an unsustainable level and the company is now guiding lower and so it can increase costs and invest in the future of its business," said analyst Jasper Lawler of CMC Markets in London.
"There does appear to be a raised bar for what companies have to do to impress this reporting season, valuations are high and QE is ending so more is being expected from earnings," he added.
"Highly valued tech stocks which have missed estimates are being severely punished, Amazon, Twitter and now Facebook being the prime examples."
- Facebook warns of increased spending, shares fall
- Omar El Akkad: Cracks emerge in Twitter's growth plan
Fiat spinning off Ferrari
Ferrari is going its own way.
Fiat Chrysler Automobiles NV today unveiled plans to spin off the sports car icon next year.
Some 10 per cent of the shares of Ferrari SpA will be sold to the public, and the rest given to Fiat shareholders.
Ferrari stock would then be listed in the U.S. and, possibly, Europe.
"Coupled with the recent listing of FCA shares on the NYSE, the separation of Ferrari will preserve the cherished Italian heritage and unique position of the Ferrari business and allow FCA shareholders to continue to benefit from the substantial value inherent in this business" chairman John Elkann said in a statement, referring to Fiat Chrysler.
Group seeks China reform
The World Bank is renewing calls for China to abandon the hard targets that have for decades governed its growth, as a slowing economy intensifies the need for the country to pursue reform over numerical goals, our correspondent Nathan VanderKlippe reports from Beijing today.
A fixation on government GDP forecasts has long distorted China's economic structure, prompting officials to bend rules and pour out money to ensure their year-end performance exactly match expectations. But those practices are growing increasingly risky for China as it faces a comedown from the high-flying decades it has just experienced, bank economists said today as they delivered their second China economic update of the year.
The "growth slowdown we are currently experiencing is not temporary but structural in nature," said senior economist Karlis Smits. He warned that "China's next transformation toward a more efficient, equitable and sustainable growth will depend on how successfully these structural reforms" – to labour and capital markets, in particular – "are made."
Earlier this month, the World Bank pared 2014 growth expectations to 7.4 per cent from 7.6 per cent, falling below the 7.5 per cent target China has set.
Streetwise (for subscribers)
ROB Insight (for subscribers)