|Summary: Despite divisions in the US Fed board, the recent move towards easing the stimulus program will boost the Aussie dollar and gold in the short term, putting pressure on those stocks that bounced after the dollar’s fall.|
Key take-out: QE easing talk should provide a short-term fillip for the $A and gold.
|Key beneficiaries: General investors. Category: Shares.|
Having a read of the Federal Reserve minutes, they are clearly a divided bunch at the Federal Reserve. Around half of the policymakers felt QE stimulus should be brought to a halt by year-end when they met in June, but wanted to ensure the US job market was solid. Ben Bernanke then spoke after market hours and said there still was a need for monetary policy accommodation for the foreseeable future. He had previously stated that he would like to slow the pace of the Fed’s bond purchases by the end of the year, with an eye to bringing the stimulus program to a close by mid-2014, but his tune has changed somewhat. Amazing how every single word that comes out of his mouth is scrutinised to an inch of its life.
So what does this mean for our market?
Aussie dollar up in the short term
Well, if the rate of bond buying by the Fed remains the same, our Aussie dollar should consequently bounce and it has - jumped to 93c from 90.5c earlier in the week. This is good thing for financial markets in the short term, a potential negative for our economy down the track. My view remains that the risk with our currency remains on the downside. In the short term, you might see stocks that have benefited from a falling $A such as Ansell (ANN), QBE Insurance (QBE), ResMed (RMD) and Cochlear(COH) drop a little in the short term. (To a certain extent, the $A has saved COH after 2 consecutive profit warnings). If they don’t, then the market is saying the $A will continue to fall despite this short term bounce. This is what seems to be happening with COH and QBE holding their ground this morning.
Source: Patersons Securities
Gold up in the short term
Looking back on it, it looks as if gold was the ultimate leading indicator to the Federal Reserve indicating a potential end to QE. Trying to explain the Gold price movement is interesting. Gold appreciating in value post GFC makes sense with investors wanting a safe haven and hedging against possible inflation due to money printing. However, the gold price was going up during the bull market between 2003–2007. The only explanation I can come up with after a heap of reading is during the boom years, gold was considered undervalued, and post GFC, it became overvalued as investors piled into it thinking the money printing would go on forever. With the benefit of hindsight, the gold price started sinking when the economic data in the US showed some good signs.
Source: Patersons Securities
Furthermore, international money should theoretically come back into our market.