Markets Rally as Fed Pledges to Keep Rates Low through 2013

Markets were higher after the FOMC policy statement was released on Tuesday despite any suggestion that there would be a third round of quantitative easing to stimulate the US economy. What the statement did say was that the central bank would keep interest rates “exceptionally low” through the middle of 2013 as downside risks to growth are likely to remain present. We did see 3 dissenting votes during the FOMC meeting, which suggests that future stimulus measures could be difficult to pass.

The initial reaction in stocks was a spike lower, as many had started to expect language suggesting economic stimulus but the lack of concern in the Fed statement and the proposal to leave rates low for an extended period of time led to the biggest S & P 500 rally in two years. Asian equities saw similar gains along with high-yielding currencies. The EUR/USD moved up, in a 1.44-1.42 range while the USD/JPY dropped to 77.30-76.70.

In Norway today, the central bank is widely expected raise interest rates by 25 basis points but one factor that could derail this expectation is a weak print in consumer inflation levels. The Bank of England will also be releasing its quarterly inflation report, and the consensus is expecting downward growth revisions.

The ECB President (Trichet) released a statement saying there is no ECB intention to intervene in the primary bond market but that this will not be the case for the secondary market, as the ECB has been raising offers for Italian and Spanish treasuries.

The German Economic Minister (Roesler) proposed the idea of a Eurozone stability council which would be able to enact sanctions on nations that disregard fiscal agreements put in place after the recent bailout. The EU Commission said that it is unclear if the EU has slipped into a recession and that the negative sentiment that is current being seen in not reflective of economic fundamentals.

The Swiss Franc continued its recent volatility during the Asian session, hitting historical highs against both the Dollar and Euro. The end of the session saw the trend reverse sharply as the SNB revealed plans to intervene in markets to lower the value of the currency. Similar rhetoric continues to be voiced in Japan, as the Finance Minister (Noda) suggested that a potential intervention by the G7 is still a possibility.

In the UK, Industrial Production numbers were lower, at 0.0% (monthly figure) and -0.3% (yearly figure). Expectations were for a rise of +0.4% and +0.2%, respectively. FTSE activity will be dictated by the quarterly inflation report and any headlines relating to the riots that have been taking place. In Australia, Consumer confidence dropped 3.5% to 89 for the month of August, but markets ignored the data and rallied higher along with most equity markets after the FOMC policy statement. spread betting