Market reaction appears overdone
Sep 25, 2013 / 5:00 am
Steady as she goes for stimulus
The US Federal Reserve’s decision to maintain current stimulus measures sent markets higher around the world this week.
From North America to Europe and Asia, investors cheered the central bank's decision to leave its $85 billion-per-month bond-buying program in place. The decision was, according to Fed officials, driven by the desire to see more proof that the US economy can stand on its own legs before scaling back the purchases. Fed officials also made it clear they could curtail the pace and amounts of bond-buying if they see greater evidence of a strengthening economy. The reaction to the announcement was almost universally welcomed by investors who had anticipated a scaling back as opposed to a standing pat. Stocks sprang to life, bond yields fell and the price of gold surged. Markets also warmed to the news Monday that Lawrence Summers – one of the front runners to replace current Fed Chairman Bernanke – had dropped out of the race. Analysts feared Summers might take the Fed in a different direction as he is less inclined to easy money policies than Bernanke or the other leading contender, Janet Yellen. With stimulus worries deflated and Syria concerns on the back burner, the next market drama is expected to be fiscal worries south of the border. If the US Congress does not pass the required legislation by October 1 a partial government shutdown could ensue.
Dow, S&P 500 reach fresh all-time highs, TSX hits two-year number
Stocks surged Wednesday on stimulus news with the Dow and S&P 500 eclipsing highs set Aug. 2 while the TSX hit a two-year plateau. For the four-day period covered in this report, the Dow jumped 260 pts. to close Thursday at 15,636, the S&P 500 gained 35 pts. to end at 1,722, the Nasdaq advanced 67 pts. to settle at 3,789 and the TSX finished at 12,926, up 203 pts.
Fed tapering not off the table, just delayed; Market reaction appears overdone
- Equities - Himalaya Jain, Director, Portfolio Advisory Group wrote: “Long-term investors need not alter their equity positioning based on Wednesdays Fed announcement, but investors focused on short-term trades should consider taking some profits by modestly trimming equity holdings in favour of cash. Even before the Fed announcement we had been gradually warming up to interest rate sensitive sectors (REITS, pipelines/utilities/telecom). With 10-year bond yields likely to remain range bound in the near-term (pending incoming data) and unlikely to rise materially above 3% we are comfortable starting to add exposure to these sectors. In our opinion, the rally in gold and gold equities is not sustainable and investors should take advantage of the recent uptick to reduce exposure.”
- Preferred Shares - Tara Quinn, Director, Portfolio Advisory Group wrote: “The Fed's decision to maintain the status quo has had a positive impact on the preferred share market. Non-bank straight perpetuals have experienced the most upside in price subsequent to the Fed announcement. This does not change our view on non-bank perpetuals and the recent rally should be viewed as an opportunity for investors to trim their exposure to this type of preferred share. On the flip side, floating rate preferred shares have been negatively affected by the Fed announcement as the Fed Funds rate is not expected to move higher until 2015. Overall, holding investment grade rate resets, with a reset spread over +2.00% should provide a decent dividend distribution to investors.”
- Fixed Income - Andrew Mystic, Director, Portfolio Advisory Group wrote: “Wednesday’s meeting does not change the overall view that investors should remain short duration. If anything, they have been afforded another opportunity to trim back longer positions caught offside. With the potential risks which lay ahead - over the next several months - we could envision a US 10-year Treasury trading as low as 2.5% (with the likely range closer to 2.5%-2.8%). Anything below a 2.5% level would suggest overbought conditions, in our view. If rates gap higher, credit will likely decouple and gap higher as markets re-price risk. Credit would likely normalize, but volatility would be in hearty supply. This suggests that investors should migrate towards better quality credits (i.e. out of low A and BBB credits to higher A and AA credits) and should focus exposures on shorter dated credits where spread volatility will likely be contained. Higher coupon bonds can help mitigate some of the impact of higher rates and can afford better carry trades for some investors."
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