Markets around the world have reacted negatively to the US federal Reserve’s latest attempt to stimulate the US economy.
There were widespread steep falls across Asian markets yesterday after US markets fell sharply.
The Dow, S&P 500 and Nasdaq were all off more than 3% or more in a selling drive that resembled some of the bad days of late 2008.
It was the biggest fall in five weeks and the falls on US markets followed the big sell off in the wake of the Fed’s announcement the day before.
At one stage, the Dow was down more than 520 points, but steadied and then rebounded to close down 391 points.
The S&P 500 is down 7% in two days, a massive over reaction.
In Europe, the falls were 4% to more than 5%, with Paris off 5.25%.
Australia lost more than 2.6%; Hong Kong over 4.8%, Shanghai lost more than 2.7%, while Tokyo saw the Nikkei shed 2%.
Australian shares is down more than 20% since its high earlier in the year, putting the market in bear territory.
The close yesterday was the lowest for two years and will go lower today
The Australian dollar fell under parity with the US dollar, then rebounded, and then slumped to around 97 US cents, its lowest level since February.
It has lost 5 US cents since Wednesday, an understandable fall given the rise in risk aversion.
Yields on 10 year US bonds fell 0.16% to a record low of 1.71%: the Fed’s ‘twist’ on rates worked, but not in the way it had hoped.
Copper shed a massive 32 US cents to $US3.44 a pound, a fall of 8.6% in New York. Oil was down nearly 7% at just over $US80 a barrel and gold and silver both slumped.
Gold lost $US74 an ounce as the metal lost its ‘safe haven’ status as investors sold. It ended around $US1,741 in New York.
Silver dropped more than 10% of 4.25 USc to $US36.22.
It was a miserable day around the globe as investors reacted badly to the Fed’s move to try and drive down long term interest rates, while allowing short term rates to rise.
In terms of policy decisions it was a massive over reaction to what the Fed announced.
Some $US400 billion will be spent by the Fed, unlike the previous attempted stimulus when the Fed created $US600 billion to buy that amount of treasury debt.
This time the money to buy longer dated mortgage securities (and not US government securities), will be generated by selling off debt up to 3 years in maturity. That’s the so-called ‘twist’ in rates.
But what also spooked the markets was the Fed’s gloomy outlook for the US economy and comments like this from the post meeting statement:
The key quote was "Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."
That dose of reality obviously surprised investors, but you’d have to ask what planet were many fund managers on.
It’s been blindingly obvious that since the first week of August, when silver prices collapsed, sparking a sell off that has slowly spread to all markets that things were not right and economies were slowing, not surging as many forecasts around mid year had built into them.
Now the Fed has recognised that reality and markets go all gooey and sag.
But what many investors, especially in the US do not understand about their own economy is how weak it is at the moment, a situation that will continue for some years more.
The Fed has already recognised that by committing to hold the Federal Funds rate at its current record low for at least the next two years, and by the latest attempt to stimulate demand in the economy.
But the Fed also seems to be ignoring the reality of the US economy: consumers have little extra cash with which to spend or invest in houses (Not the super rich who wouldn’t spend to save themselves).
So there’s too little demand in the US for goods and services at the moment and with more than 46 million people living below the poverty line and another 46 million people existing on food stamps and the occasional part time work, there’s not much chance of a surge in home buying and building and prices.
Without higher housing prices, consumers have too much debt and can’t spend as they did before the GFC.
Unemployment languishes at 9% and the reality is counting part-time workers who would prefer full-time jobs, discouraged adults who have quit looking, and underemployed recent graduates the figure is closer to 20%.
Mortgage rates are already at historic lows and pushing those down a bit more won’t change the depression in the housing market.
No job and no income, or a lousy job and no raise, equals weak demand for houses, and flat or falling prices.
And this week the IMF recognised the obvious (which many investors, of all sizes do not) by cutting its forecast for US growth to a level barely above stall speed.
In fact in cutting its growth forecasts for this year and next for the US economy, the IMF has underlined the enormity of the task confronting the US Federal Reserve’s latest attempts to stimulate demand.
The Fund trimmed its forecasts for US growth to 1.5% for this year and 1.8% for 2012, down from the June projection of 2.5% and 2.7%, respectively.
It also forecast unemployment would remain around 9% for most of the next 18 months.
And that’s the problem for the Fe
