Yesterday, US stock markets closed in the green zone (i.e. above the opening price). the President of the Federal Reserve Bank of Saint Louis told Bloomberg TV that the Fed should delay the total tapering of QE3 planned for this month. His concerns are caused by lower inflation expectations coming from investors coupled with much more volatile markets. US stock indices were busy retracing before the statement, thereby reducing to nothing almost the entire gains to all-time highs made this year. After the statement, the VIX went down from the extreme value of 31,06 down to 25,20 while the USA’s major stock indices closed the trading session with a rally.
Once again, the Fed may well taper QE3 to the end during the forthcoming 2-dayFOMC meeting scheduled for October 28th-29th. The current rate of asset purchases is $15billion. The FOMC is planning to reduce it to zero this time if the economic situation in the country favors this crucial move. The argument in favor of continuing QE3 is lower inflation pressure and inflation expectations in the USA.
Previously, the Fed made several statements regarding the fact that the pace of tapering depends on incoming economic figures. Still, the markets and central bankers have been increasingly concerned over the near-term fate of the global economy over the last few weeks. This triggered higher market volatility, thereby making investors fleeing risky assets for safe-have assets.
According to the latest FOMC meeting minutes, the Fed is concerned about a too strong dollar and a global economic slowdown.
According to the Binary Options Department of Masterforex-V Academy, if the QE3 isn’t tapered to zero this time, we may see the dollar bulls taking profit, thereby brining it down against other majors. At the same time, the first interest rate hike in the USA may be delayed until a longer-term future. Alternatively, once the Fed does taper QE3 to the end, the US Dollar may start another wave of strengthening against other currencies.
Before, the statement, the indices kept on going down. After it, the downswing stopped and started going up in value. Still, the US stock market is in correction backed by uncertainty. Most experts think that the market hasn’t found the bottom yet.
Nasdaq dropped 11%, which has been the biggest drop since 12% in 2012. Trading volume was abo the average on NYSE and Nasdaq. Year-to-date, S&P500 gained only 0,8%, Nasdaq – 1,0%. Dow Jones - 2,8%.
The positive reaction show by investors regarding the idea to extend QE3 and delay the complete tapering usually backs the stock market, even those companies with poor quarterly reports.
In late October, traders and investors will focus on the results of the Fed’s FOMC meeting. At the same time, some political risks, including preliminary US elections scheduled for November 4th, add uncertainty to the markets. If the opposing parties gain an edge, the stock market may go further down on contradictions regarding the current policies. Markets go volatile amid a mew portion of negative economic figures coming from the Eurozone. The inflation rate in the area slowed down to the lowest level in 5 years. The 10-year US bond yield showed maximal fluctuations in 5 years.
According to the Binary Options Department of Masterforex-V Academy, fundamentally, the US economy looks stable while the US stock market is currently the most suitable one in terms of profit potential despite the current retracement. The quarterly report is underway. Most likely, US corporations are going to show strong figures this time as well. At this point, there are no major factors indicating weakness in the world’s biggest economy.
