Fed announces end to quantitative easing

Minutes from the last US Federal Reserve meeting acknowledged what market analysts have been assuming for some time now; that the US economy is strengthening. However, the minutes also suggested that the Fed is unlikely to raise policy rates until the second half of 2015. The dovish message eased concerns over interest rate rise expectations. The Federal Reserve also revealed in the minutes that it has decided to end its asset-purchasing program in October assuming the economy stays on track. According to the plan the Fed will make a $15 billion final reduction at its October meeting, after trimming it by $10 billion at each previous meeting. October will thus see an end to another phase of the quantitative easing experiment.

Most Asian stock markets rose and the dollar fell on the news and European shares looked set for a subdued opening, US stock futures for Thursday were marginally weaker. China's exports in June also missed market forecasts, but caused limited reaction in markets as it reinforced expectations that Beijing will have to unveil more stimulus measures to stabilize the economy and meet its 2014 growth target. The US oil benchmark slipped on the weaker US dollar.

The minutes from the last Fed meeting provide further support to the argument that the US economy is out of danger. Previously this week investors shifted forward their expectations for the first US rate hike. As equity valuations today are represented by complex mathematical models, this shift in expectations probably led to a profit taking race amongst institutional investors, who are the first to have access to model results. For investors the shift in expectations is balanced because it also means that the US economy is going to recover at a fast pace; which means higher earnings for equity markets and less defaults for the bond market. Confirmation that the Fed intends to maintain low interest rates at least up to the second half of 2015 should provide support to markets in the short-term.

European stocks fell for a fifth day, this morning. The Benchmark Stoxx Europe 600 Index fell 2.6 percent in the previous four days, the most since March, as investors weighed valuations that are near the highest levels since 2009. The European economy is still considered fragile and analyst expressed concerns that earnings will not support current valuations. The equity earnings season starts this week.

Technical analysis indicates that European stocks have breached bottom support levels. This usually means that it is the right time to start adding equities. Personally I also find it the most difficult time to convince myself to take the plunge especially when the screen on CNBC is all red. However, it is at these times that training and experience have to kick in. At equity fund level we have added allocation to the European stock index; it is one way of spreading risk when uncertainty on single names is above average. We also added allocation to Bayer which is a stable long term investment. The less risk averese investors may see other opportunities in more cyclical stock. Over a typical investment horizon of 5 years or more the current adjustment in equity markets is normal and represents an entry point for equity markets.

Antoine