Was anyone a bit surprised the Fed’s statement was silent on the recent debt downgrade or the debt ceiling debate? Hmmm…more on that later.
That was quite the ride, wasn’t it? Down 30 handles overnight only to recover and open higher by 14, stay strong through the Fed meeting with vol elevated only to have bulls toss their cookies in a 40 handle reversal, then stage a furious rally and close up by nearly 60 handles! Whew, what a day. As yesterday faded into a rout, ending the session down 600+ points today offered a chance at ‘turnaround Tuesday’. There is no doubt the charts have incurred some great damage but it seems the sellers finished up overnight. Good sign in the short term, we’ll see a few good up days and then likely sell back down. I would look at 1100 as the area to get interested in (if it holds).
So, why did the markets rally so much after the initial response was down? Very simply the Fed is re-engaged and is aware of the economic weakness and will do whatever is necessary to support asset prices – and quickly if needed. They will keep rates down for at least two years, put that worry behind you. This will help consumers and the mortgage markets. So, there were three dissenters, but they only wanted to keep things the same and not press harder on the gas pedal. However, the man at the head of the table always gets his way. They have paved the way for not only QE3 but also any little maneuvers they need to kick-start growth. Inflation is pretty much done having a major effect on prices, the supply constraints from the Japan earthquake having abated. What makes me believer the Fed means serious business? This is an excerpt from their policy statement:
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
No endgame in sight. Sorry bears, you’ve just been pounded by Helicopter Ben – AGAIN!
The Fed could care less about the shenanigans in Congress with the debt ceiling. That circus played out and I’m sure they talked about the ‘children’ who were involved. As for the debt rating, that was clearly a function of inept government, for the other agencies did not cut their ratings at this time. Good they ignored this nonsense. They continue to buy treasuries as does the rest of the world. So, what’s the problem? Their mandate (unstated) is to restore trust and confidence and boost sentiment. Let’s hope it’s mission accomplished again.