The Fed came through yesterday and gave the market what it wanted in the form of additional quantitative easing. Markets around the globe rallied in response to the FOMC decision to purchase additional agency mortgage backed securities at a rate of $40 billion per month.
Asian markets rallied strongly, with more than 2% gains in Hong Kong, Indonesia, S. Korea and Tawain. China lagged with a gain of only 0.6%. But not everyone was happy with the Fed’s actions. The People’s Bank of China suggested the Fed’s action could spark global inflation. The Hong Kong Monetary Authority warned that the risk of a property bubble in their housing market is higher now. And the Bank of Japan was put on the defensive as the yen soared vs. the dollar sparking speculation the BoJ might have to intervene in the currency market.
Europe’s markets are also higher despite continued debate over whether Spain will need to ask for a full bailout. There is also increasing unrest in the middle east with violent protests in Egypt, Yemen, and elsewhere.
In economic news, the Univ. of Mich. consumer sentiment index rose to 79.2 for September, near its high for the year and well above last months’ reading of 74.3. Separately, retail sales for August rose 0.9% which was above expectations.
The dollar index is well lower today which is helping commodities. Oil prices have risen to $99.70 and gold prices are up a bit to $1772 after a nice rise yesterday. And the breakout in copper prices continues. The copper etf (JJC) is up over 5% for the week.
The 10-year yield is also rallying. I’m not sure if this has more to do with operation twist moving its focus to agency securities or simply an allocation move out of bonds and into stocks and commodities. The 10-yr is currently at 1.87%, its highest level since May.
For its part, the VIX had a big plunge yesterday down to the 14 level where it has pretty much bottomed each time down there this year. Today it is actually up 1.5% to 14.25 despite another up move in the stock market.
Trading comment: The markets staged a follow on breakout yesterday and pushed further into high ground for the year. This is a tough juncture because the market has had a big move and does look a bit extended. Investor sentiment is also growing more and more bullish, and we know that when the herd gets complacent the market is often ripe for a pullback. But with the Fed in QE mode, the ECB adding liquidity, and portfolio managers chasing stocks to avoid underperforming their benchmarks it does seem that dips in the market will continue to be bought until the macro backdrop turns negative again.