The last hour sell off produced a worryingly gravestone doji pattern. So far, the Dow Jones remains above its bullish trend line at 9625 but this level is at greater risk of being challenged in the near term.
Investors’ level of uncertainty continues to ebb and flow. The initial reaction of US markets to the Fed holding interest rates at unchanged levels and retaining the statement that for an “extended period” triggered a rally in US stock markets with the Dow Jones gaining 156 points in the first hour after the announcement. However, these gains could not be sustained and profit taking saw the Dow close up but with only marginal gains. This price action is typical of a market entering a period of corrective consolidation, in the very short term.
The price action also reflects the two messages coming out from the Federal Reserve. The first is we are not going to exit too quickly our accommodative stance which should be encouraging for investors; the second, given the interest rate hikes that are coming through in other parts of the world is that our economy is not growing as fast. Thus, we are in “a glass half full” situation with something from the statement for both the bulls and bears.
Arguably, of more importance are the twelve words (in bold below) that the Fed added to the statement which for the first time provides some parameters or conditions that need to occur for the interest policy to change. The statement of greatest note is “economic conditions including low rates of resource utilization, subdued inflation trends and stable inflation expectations are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.
Thus, the emphasis moves to inflation and employment beyond any other indicators and it will be these measures that analysts will be closely monitoring, going forward. If these conditions are met than the Fed will have little choice but to change its policy. As such, tomorrow’s non-farm payrolls data takes on more meaning, but with the unemployment rate expected to rise to 9.9% from 9.8% there is little chance that interest rates will be raised anytime soon. A point reflected in the Euro$ strip that last night reduced the bets that rates in the US will change in the first half of 2010.
Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:
Please note this report provides a guide to some of the relevant areas that individual investors should consider discussing with an authorised adviser in relation to their specific circumstances, it does not constitute individualadvice. As a result no action should be taken or refrained from being taken as a result of its content.
