The Fed has ramped up its efforts at stimulus and signalled that the notion of QEInfinity was right expressing its disappointment at the recovery so far and the level and length of time that Americans are spending on the Dole queues. In its statement this morning the Fed said that it will keep rates at zero until the unemployment rate hits 6.5%. It has also replaced operation twist with a new bond buying program which not only includes its commitment to purchasing agency mortgage backed securities in the amount of $40 billion per month but also to purchase longer term Treasury securities “initially” at a pace of $45 billion per month from the end of the year.
Please note the $45 billion of buying will not be sterilised in the same manner that operation twist was by selling short bonds – that is quite a big further monetary stimulus. Accompanying the statement was the Fed’s forecasts which suggest that unemployment won’t be at 6.5% till 2015 so we have at least two years of zero rates ahead of us in the US.
The result has been a lift in risk appetite with stocks higher and the US dollar and Japanese Yen under pressure. While assets that have been goosed by a weaker USD and quantitative easing over the past few years like the Aussie and Kiwi dollars, like Crude, gold and silver all rose in response to the Fed’s moves.
Equally important overnight was the unexpected hand across the aisle from Silvio Berlusconi to Mario Monti in Italy. Mr Monti, who resigned over the weekend had been making some strange noises about potentially running in the election. Overnight however Berlusconi in a grand gesture saying that he had no personal ambition offered to withdraw from the race and to support Monti as long as he came together at the head of a party of moderates.
The combination has been a very positive night across the board although it is worth saying as I write that the gains are being trimmed possibly by the reality of the economic weakness that the continuing Fed action speaks to and also the fact that markets tend to melt up in a more resilient but persistent manner than they fall.
The raft of economic data and negative comments from John Boehner on the fiscal cliff out in the past 24 hours has really been lost in the milieu including the fall in in European Industrial Production of 1.4% in October and the deterioration in the UK labour market. On the brighter side the highlights were better than expected Japanese Machinery orders for a year on year basis up 1.2% versus -4.4% expected even thought the monthly data was down a little at +2.6% v +3% expected but a nice bounce anyway after last month’s weakness. India also had a big bounce in industrial output and manufacturing output by 8.2% and 9.6% respectively from last months negative prints.
Europe was closed by the time that the FOMC statement was released but they had had a vaguely positive day regardless with the FTSE up 0.35%, the DAX up 0.33% while the CAC was essentially flat rising just 0.01%. Madrid rose by 0.82% while the Italian market rose a stellar 1.15%
In the US with 32 minutes before the close the S&P has fallen back to be up just 0.16% to 1430, the Dow is up only 0.06% and the NASDAQ is actually in the red, down 0.15%.
In Asia yesterday it was a mostly positive day with the Nikkei up 0.58%, Hang Seng up 0.80%, Shanghai rose 0.40% and the Straits Times in Singapore was 0.76% higher. In India the Sensex however fell 0.17% while in Seoul the Kospi rose 0.55%.
In Australia the All Ords continued to grind higher with the All Ords up 0.23% to reach it highest level since July 2011.
It has been a night where the previous fear based bids for the USD and the Yen evaporated in the Berlusconi and Monti news with the Euro higher, Aussie higher, Kiwi higher, GBP higher, CAD higher, CHF higher and Yen down.
As I write, the Euro is currently up 0.57% to 1.3079, AUD up 0.37% to 1.0566, GBP is 0.25% higher at 1.6154, USDCAD is down 0.25% at 0.9822 and USDJPY is sharply higher up 0.80% to 83.17 which has of course propelled EURJPY, AUDJPY, GBPJPY and the other Yen crosses much higher still given the USD was on the back foot against those sides of the Yen crosses in its own right.
But when you look at the EURUSD chart above you have to ask if this isn’t just noise within the range of the last few months. As I wrote before the last Euro reversal only a break of 1.3170/75 (plus your margin for error) will signal a change in trend for the Euro and signal a sharper push higher. Last night’s high was lower that the recently aborted top so I remain of this view.
For the Australian dollar which hit a 9 month high overnight I have a similar view insofar as the call we made yesterday of a run toward 1.06 was coming. As you can see in the chart below like the Euro the Aussie is pulling back as stocks digest the economic reality over the monetary goosing they are getting.
But as you can see in the chart above the Aussie is still in a grinding uptrend for the moment and while the step up and through the top of the Bollinger band is often a signal for a consolidation/pullback as we are seeing now the overall topside bias remains while equities are doing better. As I wrote in the AUD Cross piece yesterday its pretty much all about stocks and the S&P 500 at the moment.
As the US dollar weakened so then many of the US dollar commodities naturally increased their price in US dollars. Crude shook off an increase in EIA inventories of 843,000 Bbl versus expectations of a 2.6 million draw to rise 1.26% to $86.87 Bbl. This has not changed my overall outlook for a move to test trendline support as noted yesterday.
Gold was up 0.34% to $1714 oz. Silver surged 1.96% higher while Copper was up 0.78%.
In New Zealand the business PMI and food prices while in Australia we get inflation expectations and new motor vehicle sales. More price data from individual European countries tonight as well as Greek unemployment and then Brazilian retail sales along with retail sales in the US and PPI. Business Inventories and the usual Thursday night Jobless Claims data.
Please Note: All references to rates above are approximate and should not be used for trade reference.