Fed Feeds Frenzy

In spite of a frenzied pre-mortem, a benign statement from the US Federal Reserve’s Open Market Committee and steadying commodity markets drove investors back into share markets overnight.  A calmer, stronger ruble helped offset European growth fears, highlighted in the overnight session by further declines in inflation. European bourses largely held onto recent gains, and US markets reversed previous losses emphatically.

The Fed statement replaced the “considerable time” before a rate rise with pointed remarks that they can remain patient. Dissenting voters suggest the FOMC is more focused on employment than inflation at this stage of the economic cycle. This was enough to inspire investors, and the S&P 500 and Nasdaq indices leapt by more than 2%.

Deflation concerns are shaping up as the next theme for fretting investors. Europe and Japan are the culprits, although share prices are reacting positively to lower inflation readings, seeing them as a spur for central bank activity. While the Bundesbank president talked down sovereign bond purchases, comments attributed to other ECB members also discounted outright QE, but re-iterated a desire to “do something”. The announcement of measure to shore up the Russian financial landscape eased concerns of an implosion.

Precious metals remain under pressure, but industrial commodities rallied, with copper and oil posting modest gains. This may be enough to bring further support for Australian resource shares today. Futures markets are pointing to better than 1% gains at the open, which will see much higher volumes than normal as institutional investors trade out of their expiring December futures. Options on stocks and the index expire tonight, making today the likely last liquid trading day for the year. This may bring surprising market moves if fund managers utilise this liquidity to re-shape their portfolios ahead of month, quarter and year end.