The Fed: Early Holiday Gift to the Market

December 22nd, 2013
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Weekly Global Stocks Wrap 21 December 2013

by Cliff Wachtel, FX Empire

A summary and reminder of what drove risk appetite, as reflected in the major international stock indexes - useful for those in forex, stocks, bonds, commodities, and other markets that are influenced by overall risk appetite.

The following is a partial summary of the conclusions from the weekly analysts' meeting in which we share thoughts about what's driving major global asset markets. The focus is on global stock indexes as these are the best barometer of overall risk appetite and what drives it, and thus of what's moving forex, commodities, and bond markets.

Follow up:

It's a quick summary of last week's international stock market action and what drove it. It's our starting point for our follow up articles on:

  • Lessons For The Coming Week And Beyond
  • Coming Week Top Market Movers
  • EURUSD Outlook
  • Related Special Features: Stay tuned for an update on last week's very popular summary of the EU's Single Resolution Mechanism deal, where it succeeds and fails, and its ramifications for the EU

The actual mix depends on what are the top market stories each week.


We can summarize the week's action in US and global stocks, and their prime drivers by dividing the week into its pre and post Fed taper announcement periods:

  • From Monday's open in Asia until just before the Fed taper announcement Wednesday 7 pm GMT, 2pm EST.
  • From that announcement until Friday's close in New York.


The primary fundamental driver was speculation and caution regarding the FOMC meeting Wednesday and whether or not it would announce a start to the long anticipated curtailment or tapering of its treasury and mortgage bond purchase program known as QE 3.

The other main market driver was the strong near term technical support and resistance levels.

  • Most indexes began the week at the strong near term technical support levels, at which they ended the prior week, and so they were ready to bounce higher on any excuse, and they did so on Monday.
  • After that bounce, the lack of major bullish news, as well as caution ahead of the Wednesday meeting, reinforced near term resistance levels that were hit by Monday's close.

Thus from Monday until the FOMC announcement of the symbolic start of the taper, global risk asset markets stayed in narrow trading range with modest volume, moving with the equally modest changes in taper sentiment


From that time onwards risk assets generally moved higher on:

  • Relief that the long dreaded taper start was harmless, mostly symbolic, and did not signal the start of any material reduction in QE or any imminent rise in rates or other monetary tightening.
  • US stocks got an added boost Friday from the better than expected final Q3 GDP report. Europe and Asia were already closed and so will likely reflect that news on Monday.


Chinese interest rates were influential for Chinese and related markets, and the US final Q3 GDP beat gave US stocks a boost Friday, but the effects of both events were mostly limited to their local markets.

The only two real global market drivers were:

  • The Fed announcement (both anticipation of it and reaction to it)
  • The technical support and resistance levels that helped define market responses to these

However the week produced many more lessons for the coming weeks and beyond. See our post on lessons for the coming week here.

Here's a quick overview of last week's stock market action in the US and worldwide, and what drove it.

MONDAY: Waiting for FOMC, Bouncing Off Support Levels


Asian indexes closed lower Monday on a combination of Fed taper fears ahead of the Wednesday FOMC rate statement and press conference, and a weaker than expected HSBC China PMI survey.


All major European indexes were up well over 1% ( FTSE +1.28% DAX +1.74% CAC +1.48% Madrid General Index .SMSI +1.74% STOXX 50+ 1.36%) on a combination of stocks having hit strong technical support levels and data that justified a bounce, as well as continued belief that early taper fears were unjustified.


All 3 major US indexes solidly higher for same reasons mentioned for Europe, on light volume that suggests lack of enthusiasm

TUESDAY: Waiting for FOMC, Caution, Lack of Major News, Technical Resistance Keep Indexes Within Recent Trading Ranges


All major Asian indexes closed modestly higher except for the Chinese ones in Hong Kong and Shanghai as strong US manufacturing data, the higher US close Monday, and an OK EU PMI survey's bullish effects were moderated by caution ahead of the Fed policy meeting.


All major European indexes were down solidly to varying degrees FTSE 100 -0.55% CAC -1.24% DAX -0.86%, Madrid -0.93%, on Fed taper worries.


US indexes closed slightly down, but finished above their intraday lows, as investors stayed non-committal, with a slight bias towards an early taper, pending the Fed taper decision announcement Wednesday. US bond and gold prices fell slightly, reflecting a slight bias towards an early taper. The USD fell slightly, suggesting a mild belief that there would be no taper, or that whatever taper comes was already priced in.

WEDNESDAY: Long Dreaded Taper Start Becomes An Early Holiday Gift From The Fed


Asian indexes closed mixed, modestly up or down on caution ahead of the Fed announcement the next day (for them) at 2pm EST, which is 2 am in Tokyo.


Except for the UK, almost all European indexes closed over 1% higher, as most either wrongly anticipated no taper, or correctly anticipated that at worst case any taper announced would be mostly symbolic without any material reduction in QE or increased threat of rising rates.


In the US, the Fed announced the start of the QE taper, long dreaded as the removal of the sole pillar of the global stock market rally. Instead of plunging, the major US (and European) indexes soared (Dow +1.87, S&P +1.69%, Nasdaq +1.15%), putting the big 3 indexes at or near new all-time highs once again.


  1. Because the Fed made it clear that the start of the taper did NOT herald any material change in its dovish policy:
    • The actual cut in treasury and mortgage bond purchases was only $10 bln from its current $85 bln
    • It's maintaining its commitment to keeping short-term rates low after its bond-buying program ends, even long after the unemployment rate falls under 6.5%, until inflation threatens to move over the Fed's 2% threshold and the economy and the recovery is strong enough to handle any tightening.
  2. The fed also upgraded its outlook for the US economy, reducing its forecast for rates of inflation and unemployment, while increasing it for GDP.

In sum, the fed gave the markets everything they could realistically have hoped for - dovish policy AND improving economy:

  • Continued dovish policy and support for the economy (and hence risk assets) until the economy can clearly handle it
  • An upgraded outlook for the US economy

Mixed housing data and some negative forward guidance and indications from key market leaders like Ford (F) and Apple (AAPL) were of course ignored. Markets clearly didn't care a whit, after a gift from the Fed like that.

See our article on lessons for the coming week for further details. [change this to refer to separate post if I pull out that section to be a separate piece.

THURSDAY: Indexes Overall Higher On Continued Bullish Effects Of Dovish Fed Taper And Forward Guidance


Most major Asian indexes closed up following US and European markets' relief over merely symbolic taper, dovish forward guidance, and upbeat forecast for US economy. However China was down hard on rate spike and liquidity fears despite an emergency PBOC injection of cash into China's financial system after rates hit dangerously high levels, as the PBOC had been slow to intervene and it was unclear if it had provided enough cash or would do so if more were needed. India fell hard too.

Rapidly rising short term money market rates (benchmark rate is the 7 day repo rate) over the past year, as the government has attempted to let market forces have greater influence over interest rates, have pressured Chinese stocks. The Shanghai index is down 6.2 % over the year, and 4.2% just this past month due to the recent rate spikes


European indexes were up strongly, around 1% or more, on:

  • Continued reaction to the Fed's minor taper, continued dovish monetary policy, and upbeat economic outlook. It was an early holiday gift to markets - instead of having to choose between growth AND dovish policy, they got both. Happy holidays from the Fed!
  • EU Bank Resolution Plan: EU finance ministers agreed to a bank-resolution plan late Wednesday evening, providing some added lift for European stocks. However, the deal wasn't done yet. The European Parliament needed to approve it, but that might not happen, because the Parliament had passed its own rather different version of the deal on Tuesday.

Whatever the final plan may be, it is unlikely to justify too much cheer because it fails to provide the intended reforms. See in our special report from last week that summarized the pros and cons of the EU banking deal here, and our update for this week here.

US stocks closed mixed, essentially unchanged as they consolidated Wednesday's gains. The combination of the coming Xmas and new years' holidays, along with a relatively light US economic calendar suggests sedate trading for the rest of 2013 barring any surprises.

Mixed economic data contributed to the flat close: Existing home sales dropped to their lowest level in nearly a year and weekly new claims for jobless benefits rose to approach a nine-month high. On the bright side, the Philly Fed index of factory activity rose modestly and an index of leading economic indicators rose 0.8%.



Asian indexes ended mixed on Friday. Lacking any events that influenced all, indexes appeared to move mostly with local fundamentals and technical signals, with some up strongly or moderately, others down strongly or modestly. Both Hong Kong and Shanghai were lower, reflecting continued uncertainty about Chinese interest rates.


European indexes closed solidly higher on Friday, ending their best week in eight months, with gains fueled mostly by the dovish, market-supportive start of the Fed's taper and Fed promises to keep rates low for a long time. The better than expected US final GDP reading came too late in the day for many indexes but the bullish performance of many indexes suggests that markets' either had some advanced notice or simply correctly anticipated a bullish report.


The big 3 US indexes closed solidly higher overall (Dow +0.32%, S&P +0.56%, Nasdaq +1.15% ), putting both the S&P 500 and Dow indexes at new all-time highs, as the Q3 final GDP print beat expectations, adding to the holiday cheer started by Wednesday's dovish Fed announcements.

The U.S. economy expanded at a 4.1% annual rate (vs. 3.6% forecasted) in Q3 on stronger than expected consumer spending and business investment. The upward revision from the earlier 3.6% gain bodes well for future earnings growth.

Bullish sentiment continues to be nurtured by the slow-but-steady improvement in the U.S. economy, flows of investor cash into stock-focused mutual funds and a lack of compelling investment alternatives that make investors reluctant to sell stocks.

While there were only a few big market drivers, there were many more important lessons to learn from the past week for the coming week.

So be prepared! See our post on those here.

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