Wednesday’s action from the Fed has caused another round of selling in the USD as well as investors buying riskier assets. Although these actions acted as a catalyst for big market moves, they have simply been a continuation from recent ones. The Fed extended their exceptionally low levels until at least late 2014 from the previous mid-2013. The market reacted to this extreme dovishness by pilling into riskier assets as the Fed look geared up for another round of QE, despite the fact that most recent US data has reflected positively on the economy. Given that the current Fed is conquered by extreme doves, this can’t be ruled out. However, you could see it from the point of view that there is some scepticism out there, and maybe the US isn’t doing quite as well as it seems on the surface. Participants reaction to the news tells me that a lot of people are desperate to be in ‘risk on’ mode assets and not miss the risk rally.
Guru’s thoughts: I think this ‘risk rally’ will continue until something shocking happens or something fails to meet expectations, or at least until people realise that central banks actually don’t have a magic solution. In regards to the Fed, one problem I do have is: How does this actually help the man on the streets confidence?? I know in theory the money should trickle though and benefit the people, but surely he would just rather get betting returns on his savings.
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