Broadgate: Market News 13/12
13 December 2012
Stocks ended nearly flat on Wednesday, giving up most of the day’s gains after Fed Chairman Ben Bernanke reiterated that monetary policy won’t be enough to offset damage from the “fiscal cliff.”
His comments followed the Federal Reserve’s announcement of a new stimulus plan, which briefly pushed the S&P 500 to a seven-week high.
The plan, the latest attempt to boost the country’s struggling economy, will replace a more modest program set to expire with a fresh round of Treasury purchases that will increase its balance sheet. The program is known as “quantitative easing” or QE.
In comments after the announcement, Bernanke said he hopes that markets won’t have to tank to get a fiscal cliff deal.
“Initially the addition of QE was certainly favorable. I think, though, in the press conference, what came out is that there still seems to be a level of uncertainty with regard to the exit strategy (and) the efficacy of the current policy,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
Bernanke “reiterated the fact that monetary policy has its hands tied as far as addressing the seriousness of going over the fiscal cliff,” Hellwig added.
The S&P financial sector index, which had been up more than 1 percent after the Fed’s announcement, ended up just 0.5 percent.
Wal-Mart Stores Inc’s stock was the biggest drag on the Dow, falling 2.8 percent to $68.94 following the Indian government’s announcement of an inquiry into the company’s lobbying practices.
The Dow Jones industrial average slipped 2.99 points, or 0.02 percent, to 13,245.45 at the close. The Standard & Poor’s 500 Index inched up just 0.64 of a point, or 0.04 percent, to 1,428.48. But the Nasdaq Composite Index shed 8.49 points, or 0.28 percent, to end at 3,013.81.
Though the S&P 500 ended up just slightly, it was the sixth day of gains for the index – its longest winning streak since August.
The central bank committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion per month in mortgage-backed bonds it started buying in September. It also said it will keep its near-zero interest-rate program in place until the U.S. unemployment rate falls to 6.5 percent from its current 7.7 percent.
“The actions by the Fed were more aggressive than investors anticipated,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
“The asset-purchasing program is probably larger and more comprehensive than some might have thought.”
Negotiations over plans to avoid the fiscal cliff intensified in Washington, but U.S. House of Representatives Speaker John Boehner said on Wednesday that “serious differences” remain with President Barack Obama in their talks. If no agreement is reached, steep tax hikes and budget cuts will fall into place early next year.
Shares of Aetna, the third-largest U.S. health insurer, gained 3.2 percent to $45.91, a day after the company gave a higher forecast for profit and revenue growth in 2013.
Volume was roughly 6.58 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the year-to-date average daily closing volume of 6.52 billion.
Decliners slightly outnumbered advancers on the NYSE by about 16 to 15, and on the Nasdaq, by about 3 to 2.
The dollar was on defensive on Thursday after the U.S. Federal Reserve unveiled a fresh bond-buying stimulus programme but the yen languished at nine-month lows against the U.S. currency on expectations of more money printing in Japan.
The Fed surprised markets by explicitly linking its policy path to unemployment and inflation but that had little immediate impact because the Fed’s latest economic projections suggested no change in its previous pledge to keep rates near zero until mid-2015.
“We still hold the view that the Fed has fully delivered, and that the numerical targets set a high threshold for the eventual Fed policy exit, which still remains in a very distant future,” said Vassili Serebriakov, a strategist at BNP Paribas.
“This implies the Fed is on course to expand its balance sheet substantially, a regime consistent with a weak USD environment.”
The dollar index slipped to one-week low of 79.711 after the Fed’s decision on Wednesday and last stood at 79.891, flat from late U.S. levels, with a six-week low of 79.568 seen as an immediate support.
As expected, the Fed said it will keep buying $45 billion of government bonds each month after ‘Operation Twist’ programme expires this month, in addition to buying $40 billion a month in agency mortgage-backed securities.
These bond buying will be funded by essentially creating new money, so the Fed’s $2.8 trillion balance sheet will likely increase by around 40 percent in a year.
While the spectre of printing more money weighs on the dollar, how much that stimulus will help the U.S. economy is an open question, with some market players expecting diminishing impact from the Fed’s repeated quantitative easing.
“I can’t remember shares falling on the day of announcement of previous QE. U.S. bonds also fell even though what the Fed will do is to improve the market’s supply-demand dynamics,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
“The market’s reaction raises concerns that the market may be becoming more worried about the policy’s side effect, which includes deterioration in the Fed’s balance sheet,” he added.
U.S. shares ended flat, having erased earlier gains, while long-dated U.S. bond prices fell, with 30-year bond yield hitting a five-week high.
As the dollar wilted, the euro hit one-week high of $1.3098 on Wednesday and last stood at $1.3067, little changed on the day.
The euro had additional support after former Italian prime minister Silvio Berlusconi, who roiled the nation last week by abruptly withdrawing support for Prime Minister Mario Monti’s technocrat government, offered to stand back and suggested Monti could become the centre-right’s candidate.
The Australian dollar hit two-month high of $1.0585 on Wednesday and last stood at $1.0550, flat on the day, while the British pound also hit six-week high of $1.6173 before stabilising at around $1.6140.
The yen, however, bucked the trend and weakened against the dollar, as market players ramped up selling ahead of potentially yen-negative events in coming days.
The dollar rose 0.5 percent to 83.59 percent, edging near its March high of 84.187 yen. The yen also fell to its weakest level in 1 1/2 years against sterling, which fetched 134.88 yen.
The Bank of Japan’s Tankan survey is out on Friday and will likely show sentiment among manufacturers deteriorated in the three months to December, adding to calls for bolder action from the BOJ to stimulate the world’s third biggest economy.
The BOJ meeting will take place after Sunday’s election which looks set to see the opposition Liberal Democratic Party clinch a resounding victory. LDP leader Shinzo Abe has been pushing the BOJ for more powerful monetary stimulus.
Part of the reason for the rise in dollar/yen was higher U.S. Treasury bond yields, which makes the dollar relatively more attractive against its low-yielding Japanese peer.
“Dollar/yen has been moving up for a little while now and you’re seeing the trend continue. It gets moved a fair bit by U.S. yields and those moved up despite what the Fed did, shows you a bit of market positioning,” said Joseph Capurso, a strategist at Commonwealth Bank.
Elsewhere, the Swiss central bank is expected to keep its cap on the franc at 1.20 franc per euro at its policy announcement at 0830 GMT.
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