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Fed underwhelms pressure on Europe

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by Peter Switzer

Stock market confidence hasn’t been shattered by the Fed’s lack of QE3 talk but market makers and breakers won’t be so forgiving if the eurozone leaders come up with a dud idea tomorrow.

QE3 on the table

In summary the Fed indicated that QE3 is still on the table but economic conditions don’t warrant this desperate measure just yet. This is both good and bad news.

If the US can recover without QE3, well that’s great but if the economy keeps heading down, then the delayed QE3 could prove to be a bad policy decision. That said, as I have always argued — Europe is the main game.
The Fed repeated interest rates will be kept low until 2014 and Operation Twist will be maintained where long-term bonds are bought by the Fed and short-term bonds are sold. This lowers long-term interest rates, which should stimulate borrowing, for example, for houses or business investment.

The Dow lost 37.62 points or 0.29 per cent to 12,971.06 while the S&P 500 lost four points or 0.29 per cent to 1375.32 and this is an important support level.

The market now expects something credible for sovereign debt, bank solidity and future economic growth from the European leaders but if it doesn’t materialize, then stocks will slump.

Good economic data

On economic data for the US, the ADP reading for private sector job creation showed a big increase of 163,000 but the ISM for manufacturing was 49.8, which means it is contracting.

Meanwhile there was OK construction figures and mortgage applications rose as well.

I’m not confident about the Europeans — they have been let down merchants in the past — but I did like seeing the UK’s FTSE up 1.38 per cent and the French CAC 40 up 0.91 per cent overnight, though the German DAX was down a small 0.26 per cent.

Fingers crossed that the Europeans over-deliver because if they don’t, you will become less wealthy in one day!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, August 02, 2012

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