Bernanke hits the panic button
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
After keeping the market guessing for months the Federal Reserve finally did what the markets hoped they would do several months ago, and gave the green light to further asset purchases.
By undertaking to buy $40bn worth of mortgage back securities (MBS) per month on an open ended basis, starting with $23bn in September, the committee decided to throw caution to the winds and dispense with worrying about appearing political, in the lead up to the US election.
They also decide to keep ?operation twist? going, while also extending the low rate guidance out until 2015.
In a nutshell the Fed has undertaken to do whatever it takes to reduce unemployment, the following line underlining the message ?if the outlook for the labour market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved.? To reinforce the message the Fed also cut its growth forecast for the US economy to 1.7%-2%. The extent of the easing would seem to suggest that despite the patchy nature of recent economic data there could well be something rotten simmering underneath the US economy, which the Fed feels it needs to mitigate against now.
While some form of easing was widely predicted it remains unclear whether these new actions will be any more successful than previous ones given that the problem is not a lack of credit, but a lack of demand, notwithstanding the inflationary risks more QE will have on food and fuel prices.
There are also the additional risks that given that Europe could well flare up again Mr Bernanke has pretty much fired his last bullet, given the open ended nature of the purchases. After all there are only so many MBS?s that you can buy.
So there you have it, on the one hand the Fed has pledged to do whatever it takes to reduce unemployment, and on the other we have the ECB pledging to do whatever it takes to save the euro.
Today?s US retail sales for August are expected to show a continued recovery and rise for the second month in a row by 0.7%, while CPI is also expected to rise by 0.5% month on month.
In Europe the latest European finance ministers? meeting begins today in Cyprus where policymakers look set to discuss whether or not Spain should bite the bullet and take the opportunity to ask for a bailout. So far Spanish PM Rajoy has resisted doing so due to the enormous political damage it would do him domestically, and he found a surprising ally in German finance minister Schaueble yesterday, who stated that Spain would be ?daft? to ask for a bailout now.
The risk is the longer Rajoy leaves it, the more likely markets will be to test the resolve of the ECB, especially if economic data across Europe continues to deteriorate, and in particular Spain, which seems likely.
The ministers are also likely to discuss the latest banking union proposals, where there remains significant German opposition to some of the plans outlined.
EURUSD ? yesterday?s QE induced move higher has seen the euro move above the 1.3000 level, and this could provide the catalyst for a deeper move towards 1.3250, trend line resistance from the 1.4940 highs of 2011.
Any pullbacks are likely to find support now at the 200 day MA at 1.2830 with only a close back below the 200 day MA suggesting a move back towards 1.2650.
Key trend line support from the 1.2045 lows now lies at quite some way back at 1.2540.
GBPUSD ? the pound has moved above downtrend line resistance at 1.6175 from the 2011 high at 1.6745 yesterday and this is a key barrier to a move towards the May high at 1.6305.
Trend line support comes in at 1.5920 from the August lows at 1.5490. Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5590 from the 1.5240 lows.
EURGBP ? the slow grind higher towards the 0.8100 level continues to slowly play out. The continued failure to break below the 0.7950 area appears to suggest we could well see a slow push towards the 200 day MA at 0.8150 in the near term. We now have minor support at the 0.8000 level, while a move below the 0.7950 level suggests a move towards the 0.7880 level.
USDJPY ? the US dollar sank further yesterday breaking below 77.65 and placing greater pressure on the downside towards 75.35. After yesterday?s Fed move attention will now shift towards the BoJ to take steps to weaken the yen before it damages Japanese exports further.
We need to get back above the 200 day MA at 79.31 to target a return towards the highs last month.
Equity market calls
FTSE100 is expected to open 73 points higher at 5,893
DAX is expected to open 110 points higher at 7,410
CAC40 is expected to open 50 points higher at 3,552
FTSEMib is expected to open 358 points higher at 16,602