The US Federal Reserve returned to the money pump Wednesday and the market reacted accordingly by sending the dollar lower while stocks and commodities rose strongly.
The amount of US 600 billion that will be spent buying US treasuries over the next eight months was on the high side of expectations hence the subsequent reaction. In a statement the Fed committee once again reiterated their commitment to keep an exceptionally low fed funds rate over an extended period.
The purchase will primarily be directed towards government bonds in the five to ten year maturity range. This should provide the best support for mortgage bonds thereby keeping borrowing cost for homeowners under control. The flipside is the emergence of the US Federal Reserve as the speculators best friend as his attempt to drive the dollar lower will help to drive commodity prices higher. Whether this eventually will lead to another bubble remains to be seen.
Below is illustrated how different sectors performed in the months before and after the now famous speech by Fed chairman Ben Bernanke at Jackson Hole on August 22. This speech kicked off the expectations for additional quantitative easing. The rally in commodities and stocks accelerated after August as the dollar came under increased pressure. It is also worth noting that future inflation expectations had been falling before the speech only to increase strongly up until today.
The amount of US 600 billion that will be spent buying US treasuries over the next eight months was on the high side of expectations hence the subsequent reaction. In a statement the Fed committee once again reiterated their commitment to keep an exceptionally low fed funds rate over an extended period.
The purchase will primarily be directed towards government bonds in the five to ten year maturity range. This should provide the best support for mortgage bonds thereby keeping borrowing cost for homeowners under control. The flipside is the emergence of the US Federal Reserve as the speculators best friend as his attempt to drive the dollar lower will help to drive commodity prices higher. Whether this eventually will lead to another bubble remains to be seen.
Below is illustrated how different sectors performed in the months before and after the now famous speech by Fed chairman Ben Bernanke at Jackson Hole on August 22. This speech kicked off the expectations for additional quantitative easing. The rally in commodities and stocks accelerated after August as the dollar came under increased pressure. It is also worth noting that future inflation expectations had been falling before the speech only to increase strongly up until today.
The S&P 500 index has returned to levels not seen since September 2008 as a prolonged period of low interest rates increases the attractiveness of stocks and commodities. Meanwhile the dollar has now lost more than 14 percent versus a basket of currencies and is getting close to the previous low point recorded in November last year.
In Europe the government debt problems have re emerged with yield spreads between the safe haven of German government bond and especially Ireland and Greece widening again. This is one of the short term clouds on the Euro horizon which could potentially reverse some of the recent gains versus the dollar.
The month long rally in commodities went into a higher gear after the Fed announcement. The Reuters Jefferies CRB index gained four percent on the week from a broad based rally with the index heavy energy sector (minus natural gas) rallying strongly on the back of Saudi comments combined with the weaker dollar. Adverse weather also continues to support the already strong rally among agricultural products.
In Europe the government debt problems have re emerged with yield spreads between the safe haven of German government bond and especially Ireland and Greece widening again. This is one of the short term clouds on the Euro horizon which could potentially reverse some of the recent gains versus the dollar.
The month long rally in commodities went into a higher gear after the Fed announcement. The Reuters Jefferies CRB index gained four percent on the week from a broad based rally with the index heavy energy sector (minus natural gas) rallying strongly on the back of Saudi comments combined with the weaker dollar. Adverse weather also continues to support the already strong rally among agricultural products.
Crude oil shifted up a gear this week leaving the recent trading range behind and setting out on a journey towards 90 dollars per barrel. The rally which began before the Fed announcement came about as the Saudi oil minister shifted the upper limit off their comfort zone from 80 to 90 dollars. The announcement was probably in response to the weaker dollar seen these past few months but also a belief that the global economic recovery can be sustained despite higher prices at the pump.
For now though the US Federal Reserve will not stand in the way of further price appreciations as they attempt to drive the dollar lower.
The Fed announcement and subsequent dollar sell off triggered the move above 85 dollar with 90 now being the target, this level represents a 50 percent retracement of the 2008 to 2009 sell off.
For now though the US Federal Reserve will not stand in the way of further price appreciations as they attempt to drive the dollar lower.
The Fed announcement and subsequent dollar sell off triggered the move above 85 dollar with 90 now being the target, this level represents a 50 percent retracement of the 2008 to 2009 sell off.
Natural gas had another bad week after the rally the previous week as the weekly storage data surprised to the upside sending prices lower. The complete lack of good news continues to haunt this beleaguered product and the only support seems to stem from the relentless buying associated with long-only indices and exchange traded funds. Unless we see a change in the whether forecast for the approaching winter record storage levels will cap any major rallies.
Gold climbed to a new record high Friday and silver reached a 30 year high after the resumption of quantitative easing. Some profit taking was seen Wednesday ahead of the announcement which left both markets in a better position to react to the news. The combination of weak dollar and continued increased inflation projections brought investors back in droves and the speculative long positions through futures and ETF’s will have risen as a consequence.
Gold climbed to a new record high Friday and silver reached a 30 year high after the resumption of quantitative easing. Some profit taking was seen Wednesday ahead of the announcement which left both markets in a better position to react to the news. The combination of weak dollar and continued increased inflation projections brought investors back in droves and the speculative long positions through futures and ETF’s will have risen as a consequence.
The psychological level at 1,400 on gold should provide some near term resistance while the market decide whether the dollar should be sold even lower at this stage. Looming uncertainties about sovereign debt in Europe has the potential of keeping the market supported even if a dollar correction materializes.
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