Diverging Markets Signal Uncertainty Ahead of Fed Meeting

Domestically, the anticipation for Bernanke's speech on Wednesday has been positive that the tapering of QE will not be announced and that business will resume as usual as another day of triple-digit-gains was posted. The sixth consecutive triple digit move in the Dow Jones Industrial Average marks growing certainty that Bernanke won't ease on the $85 billion program of QE. This speculation comes from the economic reports released before the open as housing increased in May and US consumer prices rose slightly.

This positive attitude was in contrast to the close of the European session, as investors were weary of the Fed's upcoming moves and decisions with the Stoxx Europe 600 Index dropping 0.1%. Since Bernanke first hinted at the tapering of QE there has been a steady decline of about 5.7% since May 22nd.“ On QE tapering, we think Bernanke will repeat the message that the timing of tapering is completely data-dependent. He is unlikely to give more-precise indications than to repeat that if the labor market continues to improve, QE tapering could start within the next few meetings. We continue to see a 50/50 chance of a September or a December start to tapering,” analysts at Danske Bank said in a note.

One area of importance is job growth, which was around 170,000 for June and is expected to remain that way, prompting speculation that QE tapering will begin in September. The Fed has said previously that it would keep rates as they are until unemployment hits 6.5%. It currently stands at 7.6% and analysts predict that it could be until the middle of 2015 before that movement happens. Inflation is another area that is closely being monitored, if the current downtrend continues and job growth remains under 200,000 then analysts think that the first QE tapering would start around December. A revision of the inflation outlook is seen by many analysts as impending, they are waiting on the Fed however to release that information. Growth outlook is another revision that is needed, as the GDP would have to be over 3% in the second half of the year to hit previous expectations for the year.

The difference in the final hours of each of the markets, Dow Jones Industrial Average for the US and the Stoxx Europe 600 for the EU, may be just the difference in time and the data that was released. The US trading session had pertinent information released just before the start, giving the US markets much more time to digest the reports of US CPI for May and US housing data. This could give analysts more reason to believe that Bernanke will let the QE program remain on course for now and resist tampering with anything until the next few upcoming months.