It was a turbulent and horrible week for the global investors. Currencies have crumbled. Stocks were dumped as more than USD 3.4 trillion was wiped out during the week, oil and food prices being hammered, metals being slaughtered with gold price loosing 15 percent since its September 6 all-time high of $1923.60 and silver plunging 18 percent, biggest fall in 27-year, 10-year bond yield closed at 1.83 percent after hitting all-time low of 1.68 percent.
This was in response to FED's much-awaited monetary policy statement, which said that they see "significant downside risks to economic outlook, including strains in global financial market". Feds operation "Oliver Twist" is also responsible for giving market the shivers, as Fed's sole decision to sell $400 billion of short term bond and reinvesting them between 6 to 30 years period to keep interest rate low was disappointing and against the market expectation because no new additional injection of money was announced.
Neither the Fed cut interest rate it pays to banks on excess reserves nor did it launch QE3, which means that it is not going to make outright purchase of bonds. The primary concept of monetary stimulus is to boost confidence, which was missing. Apparently it seems that the whole idea of Selling Short Versus Buy Long is to activate the housing mortgage market, probably because despite two previous QE's, the US housing market has not been resilient.
Dull response from the home buyers could be because there is very thin room available for borrowers. Historically, if the US's residential investment which is 5 percent and housing service that is 12 percent are combined together, it averages roughly 17 percent of GDP. This is why housing and construction business plays key role in the US economy's stimulation.
I am of the view that this exercise will simply help to shift the money from short end to the longer end of the curve. Since Fed did not provide excess liquidity the question that remains unanswered is that how would this action improve job condition and stimulate the economy.
There are two other possibilities, one is that either the Fed is running out of ammunition or it could be that Fed may have decided to buy some more time before opting for its next monetary tool. The point to ponder is that there is a limit to Central Bank using its authority and there is every possibility that FED may have come across a similar situation, as Bernanke's dovish approach was once again countered by 3-FED members voting against the Fed's decision.
From the global perspective the current stance adopted by the FED may not be enough and it is already getting too late, with the Euro zone in disarray, presently Europe has a bigger share of the problem. The IMF reporting slow growth and cutting its earlier global forecast for 2011 and 2012, it gave a further blow to the market, as European banking sector is under threat of being undercapitalised. Euro zone banks from France, Italy and Greece have already been downgraded by the rating agencies and many are still facing the risk of a further downgrade that sent short-term borrowing cost, swap cost and Credit Default Swaps surging.
In Washington world's top economic policymakers representing G-20 countries are struggling to devise a strategy and come up with a logical announcement to calm the world financial market. There is growing fear that current European debt crisis could spark another collapse due to the European bank exposure to Greece, Italy and other nations.
Discussion are under way and European Union is working on a method for European Financial Stability Facility (EFSF) for leverage of Euro 440 billion (USD 695 billion), which if implemented could help in protecting regions bank in case of a Greece defaults. But this is not as easy as it sounds. Following Fed's footstep, European Central Bank cannot print money at will. It will require draft approval and some sort of commitment in writing. This could be the most daunting task for the European Union.
The policymakers are facing bigger challenge and they are fast losing their credibility. The threat is that they have to understand that the market is no more going to believe in their false statements. They want a real answer to the problem not pledging announcements.
Foreign exchange market witnessed a volatile session after the Fed's decision of not launching another round of quantitative easing (QE3). Its warning about growth slowdown and growing European financial unrest clobbered the global financial market, which helped US dollar to gain strength.
Euro's move will depend on the outcome of Euro debt talk between Greece and the Troika, if better understanding is reached, it could bring some stability in the Fx market. On the economic front, the market will be keenly watching US data of weekly job numbers, new home sales and consumer confidence figure for more clues. Pound Sterling lost its sheen after the release of MPC that strongly supported the BoE's stance on QE. Though the currency may be oversold and could make some correction, but Cable is likely to fall further to test new lows.
Swiss franc will remain under pressure, as SNB has once shown its determination to see weak franc. It still considers current level too strong that hinders Swiss exports. While, Yen is locked in a tight band for quite a while, and the strategy of the news government is unclear. Yen have so far made quite a few attempts to test new highs but failed to make gains. I suspect that market players may soon lose patience and yen could instead dip and loose 2 to 3 Yen in the coming days.
Gold: Although low interest rate is supportive for the yellow metal because of low holding cost, but severe USD liquidity crunch forced liquidation to generate cash. Gold like other commodity prices that mostly move inversely as being quoted against USD eased on back of US dollar strength, as it seems to have lost its safe-haven status.
However, I would like to add that apart from the Fed announcement, there are other factors responsible for the fall in gold price. Next month data to be released by world gold council can confirm that if the Central Bank's opted to stay away from gold buying due to higher price, which could have also impacted the gold price to fall.
Another big factor could be thin demand from Asia due to the rising gold price, weak Asian currencies and strong US dollar. Asia is one of the largest consumers of gold. Asian currencies slumped against the strong USD, as the Indian rupee and Indonesian rupiah fell sharply. Taiwanese dollar and Philippines peso weakened against the USD. The Malaysian ringgit and Thai baht also succumbed to a strong US dollar FX & Gold Weekly OutLook, September 26-30
GOLD - $1650. The fall may not be over yet, as gold has to break and clear a formation of channel between $1670-90. Risk is that a fall below $1635 would see a push for $1596, as a bottom is somewhere around $1580. However, a convincing break of the channel line would encourage for $1710, with the next major target $1770. Ranges for the week $1592-1740
EURO - 1.3498. European news will dominate the headlines and uncertainly may prevail. Therefore choppy trading could be seen during the week. Euro needs to break 1.3695 to test 1.33890. But initially, I see another push on the downside and if 1.3390 surrenders, we may see a push towards 1.3250. Ranges for the week 1.3210 - 1.3880.
CHF - 0.9058. This week, Swiss franc will have softer tone. It should hold 0.8920 for 0.9220 or 0.9350 or else 0.8770, if seen by USD. Range for the week 0.8810 - 0.9380.
GBP - 1.5446. A downside break of 1.5370 could push Cable towards 1.5260. But 1.5590 is the level to watch, if Sterling is unable to find resistance, risk is for a test of 1.5750. Ranges for the week 1.5250-1.5820
YEN - 76.60. Struggling to hit a new high is frustrating. Suspect failure to penetrate 75.90 could witness small USD buying break of 77.30 may encourage a test of 78.20. Or else 75.10 Ranges for the week 75.10 - 78.50.