Fed's asset purchases buy some confidence

AUSTRALIAN shares are tipped to open higher this morning after global markets surged on the weekend when the US Federal Reserve began a third round of asset purchases.

By InvestSMART · 17 Sep 2012

By InvestSMART ·
17 Sep 2012

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AUSTRALIAN shares are tipped to open higher this morning after global markets surged on the weekend when the US Federal Reserve began a third round of asset purchases.

The S&P/ASX 200 Futures Index yesterday indicated local shares would open 20 points higher, at 4412 points, while European and US stocks were also expected to open strongly later today.

The US Federal Reserve's Federal Open Market Committee issued an open-ended pledge last week to buy $US40 billion ($A38 billion) of mortgage-backed bonds until the US economy improves, while pushing out the window of lower interest rates at the same time.

The bid to stimulate the world's biggest economy, which has for several months struggled to match growth in employment with population growth, injected considerable confidence into global markets, with US and European markets surging on Friday after Australia's market closed.

London's FTSE 100 Index finished up 1.64 per cent, while the Dow Jones Industrial Average rose 53.51 points, or 0.40 per cent.

The news lit a fuse under the Australian dollar, which jumped to a one-month high of US105.72?, as foreign investors piled into the currency to take advantage of Australia's comparatively high interest rate one of the highest in the developed world.

Analysts said it would be positive for the sharemarket overall, but companies that make a large portion of their profits offshore would feel some pressure.

"It's very positive for sentiment because we know the last two quantitative easing [programs] that the Fed have implemented have ended up leading to overall lower funding costs, and we get pulled along on the back of that," ATI Asset Management's David Liu said.

"But US-dollar denominated companies such as Brambles, CSL, and News Corp will have [a] translation impact from the high currency."

The Reserve Bank prepares to release tomorrow the minutes of its September meeting, where it left the official cash rate unchanged at 3.50 per cent. With AGENCIES

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Frequently Asked Questions about this Article…

What did the US Federal Reserve announce and why should Australian investors care?

The Federal Reserve's Federal Open Market Committee launched a third round of asset purchases — an open-ended pledge to buy US$40 billion of mortgage-backed bonds until the US economy improves — and signalled a longer window of lower interest rates. According to the article, that move injected confidence into global markets and can affect Australian share prices and investor sentiment.

How did Australia's share market react in futures after the Fed's asset purchases?

S&P/ASX 200 futures indicated Australian shares would open about 20 points higher, at 4412, after global markets surged on the Fed announcement. The article says European and US stocks were also expected to open strongly, which typically helps local market sentiment.

What happened to global markets after the Fed's announcement?

The article reports that US and European markets surged: London's FTSE 100 finished up 1.64%, and the Dow Jones Industrial Average rose 53.51 points (0.40%). That global lift came after the Fed's asset purchase pledge and boosted investor confidence.

How did the Australian dollar respond and what does a stronger AUD mean for investors?

The Australian dollar jumped to a one‑month high (the article cites about US105.72) as foreign investors bought AUD to capture relatively higher local interest rates. A stronger AUD can be positive for overall market sentiment but may put pressure on Australian companies that earn a large portion of their profits offshore.

Which Australian companies might be most affected by a stronger Australian dollar?

The article highlights that US-dollar–denominated companies — specifically naming Brambles, CSL and News Corp — could face a translation impact from a stronger Australian dollar, because a higher currency reduces the value of offshore earnings when converted to AUD.

Why do asset purchases (quantitative easing) help markets, according to the article?

Analysts quoted in the article say previous rounds of the Fed's quantitative easing ended up leading to lower overall funding costs. That reduction in funding costs tends to lift sentiment and can pull markets higher, which is why the latest asset purchases were viewed positively.

What upcoming domestic event should Australian investors watch following the Fed move?

The article notes that the Reserve Bank will release the minutes of its September meeting the following day; at that meeting the official cash rate was left unchanged at 3.50%. Investors often watch RBA minutes for guidance on local rates and economic outlook.

How can everyday investors use this news about Fed asset purchases and currency moves?

Based on the article, everyday investors can monitor how global stimulus affects market sentiment, keep an eye on the Australian dollar's strength, and consider the potential translation impact on companies that earn heavily offshore (such as Brambles, CSL and News Corp). The RBA minutes and upcoming corporate updates are also useful near‑term data points to follow.