10th August 2011
The FTSE 100 index in London rebounded, opening up 1.8% at 5260.80 this morning.
Yet confidence remains shaky with the Fed's downbeat assessment of the US economy reminding investors that the global growth concerns that caused the market turmoil still weigh heavily sentiment.
There is the possibility of further QE – but is this a wise move?
Mindful Money economist blogger Shaun Richards said on his blog yesterday: "I wish to be absolutely clear that I do not support any further Quantitative Easing and believe it will be a mistake on more then one front. I think that Mr. Rogoff is particularly mistaken to suggest that targeting more inflation is a good idea. I also notice that there has been a change from some supporters of QE in that they are admitting that it creates inflation as some have denied this up to now…"
Walt Kowalski comments on the blog: "I don't see QE or anything else for a while…only when there is serious deflation and negative unemployment numbers will we see it. I'm thinking that the markets will calm down, the VIX will ease and there will be no Lehman 2.0. But I do think that the S&P downgrade has hastened our passage here in the US from the Age of Printing to the Age of Austerity… and I'm not sure it's a good thing."
Shaun replies: "I still believe it was discussed and was likely to have been suggested by Ben Bernanke but that he did not want to push the button so to speak with 3 dissenters.
"Over the next few days there will be a lot of discussion of what tools it is considering applying…"
The FTSE All-World equity index was up 1.4% following news of the Fed's promise to freeze rates, as Asia rallied 2.%. The FTSE Eurofirst 300 opened with a gain of 1.5%, boosted by miners and energy groups as Brent crude leads commodities higher with a 2.6% rise to $105.62 a barrel. The S&P 500 added 4.7%, its biggest one-day jump since March 2009.
Even with the Fed promising to stay "low for longer" the dollar index is up 0.3%, while the yen and Swiss franc remain near record levels versus the greenback, despite the Swiss central bank taking further steps to weaken its buoyant currency, reports the Financial Times (paywall).
The Swiss franc tumbled sharply on Wednesday, from record highs, after the country's central bank expanded liquidity operations and warned it would take further steps to curb the currency's strength.The euro is lower by 0.3% to $1.4358.
Alan Brown is the chief investment officer at Schroders and he told the BBC: "Investors are recognising that the authorities have very few policy levers left, as they've exhausted the physical option, interest rates in most places are rock bottom and all we're left with is unconventional monetary policy and that is why markets are really very nervous. They fear if we were to slip back into recession they don't know how far we would go down before we find a new level."
But he adds they are not selling…
"These markets create great opportunities…At these times of crisis the value players tend to hold back from bottom fishing until they can see some respite in market falls and that's what we're starting to see."
Keith Wade, Chief Economist & Strategist at Schroders, says: "After the downgrade and an extended slump in markets the Federal Reserve has acted… "It is not another round of Quantitative Easing – QE3 as some had hoped – but it may be the next best thing. US bond yields have fallen to record lows, equity markets have rallied and the dollar has weakened – all of which will help reflate the ailing US economy. Three cheers for Ben Bernanke as he rides to the rescue once more!