Wednesday has come and gone and there is nothing left to say. Everything is out in the open. The market knows what it wanted to know, got what it wanted to get and can go back to sleep….
Tuesday we had mid-term elections in the US. As expected, the Republicans took over the House of Representatives while they gained in the Senate, but did not get a majority. So Obama will have to govern the last 2 years of his Presidency (I never thought he would be a 2-term President and now his chances are even slimmer) with a Republican Congress. This means he will have to move to the right to get anything done. So he will probably extend the Bush Tax-cuts, be less strict with new financial regulation, run a tighter fiscal budget and perhaps make changes to Medicare. All of this can be explained favorable for equities. We will know more in the coming weeks.
Yesterday was the most anticipated FED-meeting in the history of the FED, it was like the moment Neil Armstrong set foot on the moon, when the Berlin Wall came tumbling down, a landmark moment and we can tell our grandchildren that we were there! We were there when Mr. Ben drove the last nail in the coffin of the once ‘almighty’ Greenback.
What did he deliver to the markets? (FED statement, statement regarding purchases of Treasury Securities):
· Further purchase of $600 billion of longer-term Treasury securities by the end of Q2 2011, about $75 billion per month
· Reinvestment of principal payments, a total of about $250 billion to $300 billion over the same period, about $35 billion per month
· Taken together this will amount to a total of between $850 billion and $900 billion or roughly $110 billion per month
· Assets purchased will have an average duration of between 5 and 6 years
· The current per issue-limit of 35% will be temporarily relaxed
· The program will be adjusted as needed to best foster maximum employment and price stability
There is actually not much news in there. By announcing a headline number of $600 billion, Bernanke gave the markets just about what was expected on the low side of QE2 and by re-investing principal payments he satisfies those who were looking for $1 trillion (so I guess only Goldman Sachs was disappointed today). All in all it seems it is just a little more than the markets expected, but not much. As a result equities rallied just a bit, Gold came back from it’s lows, but still closed in the red, the Oil rally continued, the Euro and Yen strengthened against the $, volatility got hammered and the yield curve steepened, with the 30yr losing ground while the shorter end of the curve strengthened somewhat. So it seems for the first 115 minutes of trading Bernanke got just what he expected.
Will he still be so satisfied with himself 6 months down the road, only time will tell!
So what can we say about the markets in the near term, apart from the obvious fact that they will be underpinned by 1 trillion freshly printed dollars. Let’s take a look at some charts:
The S&P, after having rallied 150 points from sep 1st, has 17 more points to go before it sets new highs for the year, which were set back in April. Should they break this resistance, 1.300 will be the next level. If they fail to take out new highs, 1.140 is the first support zone.
Gold has been in an uptrend since the beginning of 2009, when QE1 was first suggested. It is trading right in the middle of it’s trading band, with $1.325 as a short term support and $1.250 being the lower end of the range. As long as the $ keeps sliding versus most major currencies Gold has room to go up and it will.
The DAX has already been making highs for the year and is rapidly approaching the 7.000 mark which could be psychological resistance. Remember, 8.100 is the all-time high for the German Index. It’s hard to believe we are trading just 18% below those levels.
So far this year Germany has been outperforming most other European indexes this year. It might be because of the composition of the DAX but I think it’s more a safe haven play then anything else. Just as people want to be invested in Bunds they favor the DAX over, for example, the CAC.
All in all, QE2 should underpin equities and commodities well into next year, we have some room to continue going higher, but we are nearing resistance levels and if the economy does not start to show signs of growth it will be difficult to break through these barriers, as far as I can tell.
After the markets digested the outcome of the elections and Ben’s renewed liquidity boost equities managed to eke out a gain:
Dow +0.24% SP500 +0.37% Nasdaq +0.27% EUR$ 1.412 WTI 84.9 Gold $1348.5
Financials were the strongest sector +1% as hopes for less strong regulation and the hopes of a steeping of the yield curve attracted fresh money. Basic Materials ended the day softer -0.38% as commodities were subject to profit taking in the wake of the QE2 announcement.
Now that QE2 has been established there is a chance investors will actually start looking tat corporate earnings and economic data again. In Europe the financial sector is starting to report Q3 numbers, but the next highlight of the week will be the Non-Farm Payrolls report on Friday. Yesterdays ADP showed unexpected growth in the number of jobs, which might bode well for Fridays numbers. Then again, the correlation between ADP and NPF is statistically not relevant.
For now, I go back to sleep….
Happy Hunting & Let’s Be Careful out there!!!
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