Asset markets buoyant on rising tide of Fed reserve stimulus


Overview: Both cyclical and defensive assets rallied after the Federal Reserve surprised the market by failing to taper its massive bond-buying programme last Wednesday. Defensive assets like gold moved up as investors now…

    ETF Securities Research

    foresee potentially longer period of US Dollar debasement than they previously assumed. Meanwhile cyclical assets moved up on the hope that longer stimulus will ensure the economic recovery remains robust. The Fed indicated the primary reason for delaying tapering was lower growth projections resulting from financial market conditions (most notably higher bond yields) adversely affecting the real economy. With large portions of its post-meeting statement having changed from its previous one, the Fed has signalled the need for a broader improvement in economic conditions before its stimulus is withdrawn. Expectations for a more supportive Fed stance were also reinforced by the likely nomination of Janet Yellen as the next Fed Chairman.

     MA Weekly 23.09.13 1Commodities: Fed tapering delay spurs commodity rally. Both cyclical and defensive metals benefited from the Fed’s decision to delay tapering. While platinum remained in the doldrums following poor EU car sales, palladium rallied 5.2%. With the US having to approve a budget and avert a government shut-down, investors are increasingly likely to look to gold as a portfolio insurance vehicle. Brent oil fell 2.5% as fears over supply tightness faded. Geopolitical concerns in the Middle East subsided after the UN Security Council convened to draft a resolution that will rid Syria of chemical weapons without immediate air-strikes. In addition Libyan production is reported to have recovered back to 40% of its pre-war capacity, from a near total shut-in earlier this month. At the same time Saudi Arabian output is at near record levels according to the International Energy Agency.


    MA Weekly 23.09.13 2Equities: Gold miners found strong support last week as the decision to taper QE was postponed. With the consensus clearly expecting the Fed to reduce its bond buying activities, the decision to maintain its existing policy surprised the market. Most asset classes reacted positively to the announcement as the FTSE® MIB Leveraged Index rallied over 6% last week, while the LevDAX® x2 Index rose 4.7%. However, the big winner of the week was the DAXglobal® Gold Miners Index, which surged 8.3%. Gold mining companies not only benefitted from the equity market rally, but also from the rise in the gold price, which jumped 2.8% last week. Gold miners have rebound 29% since the index reached a 5-year low in June. While the Fed has indicated the course of its policy remains ‘data dependent’, consensus clearly favours tapering before the end of 2013. Our view of a more favourable economic environment (and gradual removal of accommodative policy) supporting demand for cyclical assets remains in place.

    MA Weekly 23.09.13 3Currencies: Indian Rupee surges on surprise rate hike. The Indian Rupee continued to rebound, and was the best performing currency index in the exchange traded segment. Investors continue to respond to the strong stance from the Indian central bank, after the Reserve Bank of India unexpectedly tightened monetary policy by hiking rates in the face of ongoing inflationary pressures.


    USD continues lower in the wake of FOMC disappointment. As we highlighted last week, the US Dollar weakened against most G10 currencies last week after the US Federal Reserve surprised the market by keeping the status quo with its stimulus policy. The beneficiaries of the more positive investor sentiment have been those G10 currencies that have lagged in recent months, like the Australian dollar and Swedish Krona.

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