Markets jump on stimulus measures, open-ended commitment to jobs market
US Fed Chairman Ben Bernanke delivered what the market had built its latest rally on – more economic stimulus. Although slightly less grandiose than previous easing measures, QE3 is notable for its time limit. It doesn’t have one.
What the stimulus measures lack in punch – purchasing US$40 billion of mortgage-backed securities each month is significantly less than the $1.25 trillion announced in 2009 and the $600 billion in 2010 – they more than make up for in duration as they’re linked to an improving jobs market. What that looks like and when that happens is anyone’s guess but Bernanke says the employment picture must improve “substantially.” And if the Fed does not see improvement it said it is ready to do more. So while appearing light on the surface, the latest move is bold and has the potential to become big. Bernanke felt the Fed had to act with the American jobless rate stuck above 8% since February 2009. Under Congressional direction, the Fed has a mandate to maximize employment.
Word of further stimulus sent traders into stocks, gold, oil and financials with each group benefiting from the announcement. The central bank took other steps Thursday. It said it would continue its Operation Twist program through to the end of the year, which sees the Fed purchasing US$45 billion a month in long-term Treasury bonds. The Fed statement also said it would hold interest rates at near zero through mid-2015; further withering yields, which is the key reason for the new “risk on” sentiment.
TSX surges, Dow, S&P at 5-year highs, NASDAQ highest since 2000
For the four-day period, the TSX added 92 pts. to close at 12,360 with gold miners and energy producers leading the charge Thursday. Bullion jumped over US$35 an ounce to $1,766 in response to Fed money printing and in anticipation of inflation down the road. WTI oil rose US$1.30 a barrel to close at $98.31.
Multi-year highs were recorded for all New York indexes with the Dow adding 233 pts. over the four sessions to close at 13,539. The S&P 500 rose 22 points to end at 1,459 while the Nasdaq moved 19 pts. to finish at 3,136.
Co-ordinated global stimulus measures support near term cyclical rally
- Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “equities remain our preferred asset class in the context of the current interest rate environment…we see more attractive valuations in the Energy and Materials sectors in Canada, and U.S. Industrials, Technology, Health Care, and Financials.
- Fixed income. Andrew Mystic, Associate Director, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
- Portfolio strategy. Scotiabank GBM Portfolio Strategist Vincent Delisle says: “synchronized (ECB, Fed, China) easing positives should outweigh risk of weaker data in the near term…we believe a higher-beta sector stance should add value.
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