In the last Federal Reserve Open Market Committee meeting under Ben Bernanke’s stewardship, a $10 billion a month reduction in the Fed’s controversial bond-buying program was announced, starting in January. The taper will be split evenly between Treasury purchases on the open market, and purchases of mortgage-backed securities bought from the big banks.
The Fed will still be inventing $75 billion a month to purchase these securities.
As expected, the dollar posted strong gains on the news, but the stock market also soared. This is because of the sweet-talking that Ben gave the markets, announcing that the Fed would keep its “zero interest rate policy” (ZIRP) in place, even after unemployment reached 6.5%. This means a continuation of cheap loans for stock buy-backs, which raises share prices, as well as for mergers and acquisitions.
Precious metals actually held their own in oscillating trade after the Fed announcement, until a sell-off late in the day sent prices just below $1,220. Gold saw a another sell-off late in Asian trading, to send prices under $1,210, and then a brief blip early in New York that momentarily broke the $1,200 level to $1,997. The recovery from that blip was immediate, leaving gold between $1,200 and $1,210. Palladium is the only one of the Big Four to avoid the second sell-off, and is trading slightly below Wednesday’s New York close.
The dollar hit a five-year high against the yen and a two-week high versus the euro before easing slightly, but the DXY dollar index is holding onto most of yesterday’s gains, over 80.5. The S&P 500 closed at another record yesterday, and all major markets except China gained after hearing Bernanke’s lullaby. Chinese stocks and the Hang Seng were the exception, as the PBOC declined to add liquidity into the market yesterday, in an effort to combat inflation.
In the U.S., the Senate passed the partial budget deal, cheering up markets, but first-time jobless claims unexpectedly spiked 10,000 applications to 379,000. Analysts were expecting a continuation of last month’s great employment trends, calling for first-time jobless claims to drop. Continuing unemployment claims rose by 94,000 to 2.88 million. The yield on the 10-year Treasury hit a three-month high of 2.942%, before easing slightly to 2.93%.
Now that the last Big Thing of the year is out of the way, traders will be clearing their desks and straightening their accounts for the end of the year. Expect the usual light volumes and volatility as large funds rebalance their portfolios, causing out-sized moves.