Thursday, 19 March 2009

The man who can really move markets - Chairman Ben

The FOMC surprised the markets yesterday with its implementation of the Brave New World of Quantitative Easing. The Federal Reserve will expand its balance sheet by more than a trillion dollars and will be buying, over and beyond its current substantial holdings, a further $750 billion of mortgage-backed securities, $300 billion of long dated Treasuries, another $100 billion of agency related debt, and an expansion of the eligible collateral to almost certainly include some even more dodgy paper that will be quietly leaked into the market via hedge funds who become private partners in the ongoing financial chicanery that is the TALF.

The implications for the financial economy are far reaching and this was witnessed across the spectrum of asset classes as the charts below reveal.

Will it all work? Nobody knows - but it is a massive gamble and raises the specter of a dollar crisis and an eventual major hit to the Fed’s balance sheet when all of these low yielding Treasuries have to be unloaded into a market in the future where inflation may be a big issue and long dated bonds with 2% coupons will look extremely unattractive.

On to equities and the S&P 500 celebrated the news with an immediate rally after the FOMC statement that took the index above 800. There was a retreat into the close but the mood seems set to endure and the 825 which I have targeted now could be done in the next few sessions.

The long term hourly chart for the SPY proxy clearly reveals how the index has moved back exactly to the level following the gap down (highlighted in yellow) which took place on February 17th. There could be a struggle during today’s session to regain the pre gap levels and assuming this hurdle will be overcome there should be even stiffer resistance in the vicinity of 84 on the SPY proxy which corresponds to the 830 area on the cash index.

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