FTSE surges - but doubts remain elsewhere
05 November 2010
The Macro Trader’s view:
After FOMC policy makers openly disagreed about QE2 tactics two weeks ago and un-nerved the markets, traders were re-assured on Wednesday when the FOMC announced a US$600.B QE2 program to be implemented by the end of Q2 2011.
This was the option originally favoured by Bernanke and assumed by traders to be the way forward. As a result stocks globally have taken the policy decision well and rallied. Indeed markets look far from over-extended as they have only just regained the levels seen immediately before the Euro zone sovereign debt crisis, which caused panic-selling.
Naturally US equity markets should be the main beneficiaries of the Fed’s policy action as the new Central Bank reserves set to be pumped out will enter the US economy, but the globally economy will be affected too.
For those economies that are struggling to gain traction a hopefully more vibrant US economy will provide opportunities. But for those economies that are already growing fast, especially those of China, India et al there is the problem from a potentially much weaker Dollar. Because they are growing fast, hot money will look to invest there for higher yield. The authorities do not welcome this as it will drive up the value of their own currencies and hinder growth.
For China the problem is different; the Rinimbi is pegged to the Dollar and isn’t fully convertible, but China has massive US Dollar currency reserves of the order of US$2.0T. A weaker Dollar will effectively devalue these holdings and China is none too pleased.
But for western stocks the Fed’s move is positive. The UK and Euro zone are important trading partners of the US and while their currencies will undoubtedly rally against the Dollar, the potential trade opportunities should outway this.
Moreover, in the Euro zone the lead economy is Germany which is enjoying a fast recovery. A stronger Euro isn’t yet a problem because interest rates set by the ECB for the wider Euro zone are much lower than they probably would be were they set by the Bundesbank for purely German domestic needs.
In the UK the Pound was heavily oversold during the recession, so a rally is welcome by the Bank of England as an offset to persistently higher than expected CPI inflation.
In conclusion, traders have moved on from the original financial crisis and this year’s Euro zone Sovereign debt crisis and the Feds QE2 is just the shot in the arm equity markets need.
Mark Sturdy
John Lewis
Seven Days Ahead
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