Wednesday, September 21, 2011

We'll do the twist, the print, the asset purchase too!‏

Everyone's hanging out for the statement expected from the FOMC meeting which was started yesterday and continues today.

This article provided a pretty accurate brief of what we might see from the FOMC tonight:
(1) Operation Twist (duration extension): mostly priced in - impact minimal,

(2) Cut interest on excess reserves (IOER currently at 0.25%): possible, but no surprise factor and could backfire (negative impact on domestic banks, money market funds, reduces GSE incentive to lend to banks),

(3) QE3: market upping probability of QE3, but still likely positive impact,

(4) Pledge to keep balance sheet unchanged for a long time. Medium probability - a much cheaper option for the Fed than QE3,

(5) Setting explicit inflation/employment targets: low probability - Fed moving to increased transparency, however can’t see Fed giving up discretionary mandate just yet,

(6) Setting explicit GDP targets: a very bold move, much more inflationary - very low probability. The most likely scenario is Twist + some combination of 2 & 4, with the markets rallying initially whilst debating the real impact and sellers try to fade the move (starting around SPX 1250). If we do get QE3 then clearly 1300 becomes a more attainable target. Courtesy of Zero Hedge.
The August meeting resulted in a surprise (Bernanke proposing that federal funds rate would be kept low for another 2 years), my feeling is that they will once again surprise, so am expecting something different to or on top of ‘Operation Twist’. Even though I think we should ‘expect the unexpected’, I don’t think we will see ‘shock and awe’. They will need to keep something in their bag of tricks incase the situation in Europe worsens, which could happen soon with changes to the EFSF still in question (Slovenia the latest hold up).

The market is currently event driven. We should expect some large volatility overnight as rumours, conjecture and finally the announcement provide direction for the markets and metals. What comes next is just about anyone’s guess.

The GDX and HUI are once again trading above their breakout points and Gold is trading back above US$1800 (Just!). Short term the prices of Gold, Silver and precious metal related stocks are at the whim of sentiment driven trading based on tonight’s announcement... medium term I believe they will all trade at much higher prices.

BB.

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