Mid 2012 can be called the time of hopes for most stock traders and investors around the globe, who were not in a hurry to trade big and preferred to wait till the situation clarifies after multiple statements made by the ECB and the FRS.
At the same, the vector of commodity and stock markets indicated the domination of optimistic sentiments, even amid another round of quantitative easing (QE3) started by the Fed Reserve.
QE3: Good Intensions and Footless Expectations
On September 13th 2012, the Federal Reserve announced a new wave of financial interventions in the form of another round of quantitative easing (also known as QE3). QE3 implies:
· Spending $40bn a month on mortgage-bond purchases.
· Keeping the key interest rate low around 0-0.25% till mid 2015.
· Increasing the share of long-term bonds in the Fed’s portfolio by $85bn a month till the end of 2012.
The major goal is to improve the current situation in the US labor market and to increase the amount of new jobs.
Market Reaction
Before the announcement of QE3, S&P 500 was above 1400 - the local high set in Q3 2008.
QE3 together with tensions in the Middle East lead to a number of consequences:
· The market of Brent oil consolidated around $114/b.
· EURUSD strengthened up to 1.28 even before QE3 was officially announced.
· Precious metals started appreciating.
The reasons remained the same: expectations of higher liquidity in American and European markets.
Mario Draghi also confirmed the ECB’s decision to start another bond purchase program. However, the ECB maintained the key interest rate at 0.75% despite expectations. At the same time, Moody’s Investors Service cut the EU’s credit rating outlook to “negative” in September. The Supreme Court of Germany approved Germany’s participation in the ESM (€190bn).
Expert Opinion: QE3 – Tool For Manipulating Financial Markets
Few people actually see that financial markets have been openly abused for a couple of years. The thing is that the US authorities keep intervening in natural market processes by pumping the US stock market with excessive money in order to support growth, which allows investors to make brave investments on positive emotions. Actually, the growth is artificial as it isn’t backed by anything that has real value. This leads to further degradation of the entire market system.
In reality, all the activities made by the Fed in the open market (QE, Operation Twist) have a much bigger impact on the US stock market than most of us think. We are constantly persuaded that the market is mainly driven by economic news, oil prices, “Greek default” and other major events.
However, the real reason why we can see the market strengthening is the artificial stimulation of the US economy.
During the first 2 rounds of quantitative easing, the money was poured into the US stock market through the US banking system. After those rounds were over, the bubbles burst, thereby eliminating excessive liquidity and the expense of “wise investments”.
In September 2011, the Fed decided to start Operation Twist, which ended with another major retracement move.
QE3, which is currently underway, is actually unlimited in time. It will last until the situation in the US labor market improves dramatically. This means that after the goal is reached , QE3 may end at any moment.
By the way, Friday’s Non-Farm Employment Change showed positive readings: +146K in November.
According to Igor Vasev, an expert form , the natural market processes are currently distorted. During times of stimulation, the market feels better than usual. The volatility declines as the market starts showing stable growth, which makes it easy to benefit from the situation.
When the period of stimulation is over, the market collapses, thereby depriving most traders and investors of their profits.
