If you had taken a straw poll last week of economists, you would have found few who would have bet on a Fed tapering announcement next week, after the budget agreement and today's retail sales data, I think sentiment has changed materially. I too am now in the camp of a tapering announcement at next week's meeting. If it does come, I imagine it will come with forward guidance on interest rate policy. The FTSE 100 fell again today for its worst losing streak since 2008. The strength of the pound particularly against the US dollar appears to be taking the bulk of the blame. The pound reached a 2 year high against the US dollar as expectations are that the UK will be the first country to raise interest rates. The good news is that the strengthening pound should help inflationary pressures allowing the Bank of England more flexibility to keep rates lower for longer.
It is an unusual paradox that the economy that is apparently performing the best has the worst performing stock market. The economy appears in better shape now than it did 6 months ago yet the equity market has given up all the gains of the past 6 months. Reading a Citi research report tonight they have a target of 8000 for the FTSE 100 for the end of 2014. The assumptions they use to get there are a strong rebound in earnings compounded with a rerating relative to history.
I think currently equities are suffering from a surfeit of bullishness, equities are supposed to climb a wall of worry, at present not many worry. Investors have had a good year so far and are not chasing gains into the year end. They are also probably happy to leave some performance for next year. Uncertainty what the Fed might do next week probably weighs on investors' minds and are happy to wait and see how the bond market will react to a tapering announcement.