Global Stock Markets Post New Yearly Highs on Fed Stimulus Proposals
Stock markets around the globe finished strongly into the end of the week on increased investor confidence stemming from the latest decision from the US Federal Reserve to stimulate the economy in a third round of quantitative easing. At the FOMC monetary policy meeting on the 13th of September, the US Federal Reserve elected to leave interest rates at their current low levels (which was widely expected by the investment community). What was less certain, however, was whether or not the Fed would decide to inject monetary stimulus as a means for supporting the economy. Ultimately, the decision was positive for global asset markets, as the Fed announced plans to purchase mortgage-backed securities in the amount of $40 billion each month.
The reasoning behind the decision came from the fact that growth figures (measured in annual GDP) and the labor market (most closely watched in the monthly Non Farm Payrolls report and the Unemployment Rate) were showing continued weakness and a sluggish scope for recovery, and that an additional round of quantitative easing stimulus would support corporate growth through elevated stock prices. While some analysts have speculated that the move is coming more as a result of the upcoming presidential elections (slated for this November), the result was the same, nonetheless, and stock markets around the world rallied on the higher GDP forecasts that will now become a part of analyst expectations.
Widespread Market Rallies
While the monetary policy response will most directly affect equity markets in the US, last week’s response in stocks was truly global in nature. Most of the major indexes (in the Americas, Europe and in Asia) finished higher after the US Fed policy decision, with the FTSE 100 in the UK seeing its highest trading values in 6 months and the S&P 500 in the US showing its highest levels since the all time highs in 2007.
Given the strength of the latest moves, spread betters will likely carry the positive momentum into next week, as markets are still returning to full size after the low volumes seen this Summer. With the larger number of market participants, there is scope for the latest rallies to extend further and likely bring a positive close to the month of September. But even with all of the positive momentum, spread betters should be conservative in entering into buy positions at these levels given the fact that wehave already posted new highs for the year. Conservative traders will likely wait for some retracements before getting back into stocks on the long side.
The latest moves in the S&P 500 have been forceful and decisive and looking from a long term perspective,there is little to suggest that we are likely to encounter a significant bearish decline any time soon. That being said, prices are very expensive at the moment, so the preferred straetegy is to buy dips rather than breakouts. The first level to watch on the downside comes in at 1390, and this is followed by 1325. Only a break back below 1260 will suggest that a medium term top is in place.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.