Judging by Friday’s sharp sell-off US investors are struggling to understand the rationale behind last week’s decision by the Federal Reserve to keep rates unchanged. This uncertainty is likely to be reflected on this week’s trading activity with the debate over last week’s decision likely to break out into a lively debate throughout the course of the week.
We’ve already had St. Louis Fed President James Bullard argue over the weekend that last week’s decision was a mistake and we are likely to get further grist to this particular mill with a host of Fed speakers this week including the Atlanta Fed’s President Dennis Lockhart, who is due to speak later today and on another two occasions later this week.
In early August he stated that the bar to not raising rates was a high one, and yet he chose not to dissent to last week’s decision so it will be particularly interesting as to what caused him to keep in line, and not dissent like his Richmond Fed colleague Jeffrey Lacker. Fed chief Janet Yellen is also due to speak on Thursday.
In Europe today it’s somewhat of a mixed bag with the German DAX in negative territory largely as a result of a huge decline in Volkswagen (XETRA:VOWG) shares after it emerged that the company had been cheating on US air pollution tests for years. The company will have to recall nearly 500m affected cars which will cost it millions of US dollars, and that’s even before the damage to its brand and potential fines.
CEO Martin Winterkorn’s attempts to get out in front of the allegations appears to be an attempt to mitigate any long term reputational and financial damage as the company looks at potential fines of $18bn. Earlier this year the shares were trading above €250, and were already under pressure, closing at the end of last week at €162, down 35%. This morning’s news has sent the shares down below its 2014 lows, and down another 16% in a scandal that is likely to pose some awkward questions for senior management, at a time when sales are falling in both its key markets in the US and China .
In the London market RSA (LONDON:RSA)’s shares dropped like a stone after Zurich Insurance Group AG (SIX:ZURN), which only last month put in a bid of $5.6bn bid for the UK insurance group, unexpectedly dropped its bid leaving its prospective partner in the lurch and a lot of disappointed investors stranded at the altar, so to speak. Zurich cited a more difficult trading environment in the US as well, losses of $275m as a result of the Tianjin port blast in China.
Overall though we’ve seen some cautious buying in Europe as investors continue to weigh up the after effects of Friday’sdeclines and a US central bank that appears to be now grappling not only with the problems of the US economy, but the global economy as well in terms of the timing of a US rate rise
The Dow Jones is expected to open 6 points higher at 16,391.58
The S&P500 is expected to open unchanged at 1,958.03
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