More Sweets from the US Fed

What it the difference between the Fed and my mother? When it comes to giving out sweets, not much. The behavior that we are seeing in financial markets is not much different from that of a child wanting more sweets; and the Fed is acting just like the typical grandmother unable to resist seeing the child cry. Obviously children are the best actors in the world when it comes to sweets; Wall Street is not far behind.

And why aren’t we all so happy that authorities continue to support our equity funds? For two simple reasons; the basic premise is that equity markets perform best when firms are growing, and firms in the US are growing! So why keep rates at such low levels unless the Fed sees problems going forward. So one reason that is keeping the Fed from increasing rates is the anticipation of future problems, and we do not want that.

The second more important reason is that low interest rates are intended to discourage savings. But may savers cannot maintain a decent living standard on low interest rates. I am referring in particular to pensioners who are now unable to live on the interest being generated by a lifetime of savings. So while low interest rates are definitely a boon to the short-term investment manager, or the day-trader, the rest are probably better off with a dose of reality.

Elsewhere…

US

Minutes from the Federal Reserve’s 16-17 meeting showed a number of policy makers expect economic growth to be impacted by a weak global economy. The committee hinted that it intends to maintain interest rates close to zero for a considerable period of time.

Market participants were expecting more hawkish Fed minutes, however, the minutes showed that the Federal Reserve is concerned about what is going on around the globe and how the dollar is being affected. The overall market reaction is that authorities are not going to raise interest rates any time soon. By the end of the session the S&P 500 index increased by 1.75%.

Asia

Asian stocks rose for a third day this week after the US Federal Reserve showed concerns over a global economic slowdown. Market participants expect US interest rates to remain low longer. Japan’s Topix index added 0.4%, Australia’s S&P/ASX 200 index added 1.2%.

Europe

Europe followed the US’ lead; European Stocks rallied on confidence that the US Federal Reserve will keep interest rates near zero. The Euro Stoxx 50 index gained 0.8% by 9.30 this morning.

The positive reaction of the European market comes amid data that exports in Germany slumped 5.8% in August, their largest fall since the peak of the financial crisis. Thus data is consistent with previous statistics showing that Germany has stopped growing. Pressure is thus mounting on Chancellor Angel Merkel to revert to economic support. Germany has a trade surplus of over 2.2% of GDP. This means that Germany exports circa €20billion more than it imports. Economists are insisting that Germany should shift some focus on internal consumption, aiding a slowing German economy and at the same time assisting the recovery in the European region.

The BOE will communicate Interest rates this morning, rates are expected to remain unchanged as a faltering euro-area economy and data on weak domestic growth are weighing on the Central Bank’s decisions.

Airline Stocks

Airline stocks continued to retreat on concerns about the spread of the Ebola virus. The US will begin Ebola screening at five US airports for passengers coming from three West African Nations.

Commodities

Industrial metals rose, led by copper, as the dollar fell for the fourth day on signs the US Federal Reserve will hold back on increasing interest rates. Commodity prices are mostly traded in US dollars and normally are negatively correlated to changes in the price of the dollar.

WTI crude traded at its lowest price in 17months after crude stockpiles in the US increased. WTI has declined 11% this year amid accelerating output from producers. OPEC which controls about 40% of global supplies continues to increase extraction and has pumped over 30 million barrels a day in September. The US is currently pumping 8.8 million barrels a day.