Don’t fight the fed – but keep your eye on your coat at the equity party…

2 mins. to read

The FOMC meeting ended yesterday with the decision to (yet) unfold another round of quantitative easing – QE3 – as widely expected by many.

The Federal Reserve stated in its press release that the committee has agreed to increase policy accommodation by purchasing additional mortgage-backed securities at the pace of $40 billion per month. According to the statement, there is neither a limit to the asset purchases nor an end date. The FED assures it will extend its program until there are signs of recovery in the job market. To complement the open market purchases, the FED will continue with its Operation Twist, in an attempt to extend the average maturity of its holdings of securities. Finally, the FED kept its key interest rate unchanged with a target between 0% and 0.25% and sees the rate staying at these levels until mid-2015, extending the expected duration of the low rates from its last meeting. The decision had just one dissenting vote from Richmond FED President. In the introductory words, the FED expresses concerns about the slow growth in the job market, a decrease in business investment, and a struggling housing market, as main triggers for QE3.

Equity markets around the globe reacted with unbridled enthusiasm to the announcement even though many traders were afraid that most of this decision could be already priced in. Truth is that the FED statement was relatively vigorous and is a strong commitment to get the jobs market back on track. The S&P 500 was trading at around 1,436 at 17.30 UK time, just before the FED announcement and futures have now risen to 1,461. Gold had a massive boost as investors jumped in feet first due to rising concerns of future inflation led by QE3. The precious metal was trading at $1,719 and jumped to $1,766.

The FED action is expected to help boost equity prices until the end of the year and likely underpin the current market bullish stance – it seems the old adage “Don’t Fight the Fed” still holds. The effects on Europe may however be negative as the US dollar will likely be pressured down and so hamper exports in the Eurozone. Mario Draghi’s response to the crisis, engaging in sterilised bond-purchases, has also so far pushed the Euro higher. With the FED adding another quantitative easing program, debasing of the US dollar will and already is occurring – exporters in Europe will enter a difficult period. In fact, the likes of Portugal and Greece are fighting to implement austerity measures that have been aiming at lowering labour costs in a desperate attempt to boost exports. The strong Euro will make it even difficult for these countries, and sooner or later, we will be debating the sovereign debt problem again. For now though, it is a short term buying frenzy!

For us however, we have our eye on the coats for the door at the equity party that has been in process this last few months and that many have missed out on.

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