Since noon yesterday any trading and short term investment decision, it seems, has been taken with today’s Fed statement in mind. The downgrade of Italy had muted impact on the markets as it was not really a surprise and more important things are waiting to happen.
In this environment the overnight action was following the same pattern. Most equity markets in Asia are unchanged and the same goes for currencies, commodities and fixed income. We are in the waiting mode for “operation twist” from the Fed. On a side note I am amazed how we get attached to these strong titles for policies with zero impact. It was the same for QE1 and QE2.
I do wonder, however, what is the Fed thinking. Similar versions of operation twist were implemented with no result. Why would it be different this time around? How can low long term interest rates, if that is the goal, can help an economy swamped by huge budget deficits, i.e. government demand for liquidity? Even if the costs of long term funding goes down markets know is only temporary and their expectations of higher taxes, inflation and higher interest rates remain unchanged. Therefore no investment should be expected from those policies. The only policies that would work would be those committed to lower budget deficits in the future which yes does mean a clear and transparent program for cutting government expenditures. That is why you need to lower taxes to make it through this period. I will get back to this after the Fed announcement.
Today is a special day again. But in the grand theme of things will not make or brake the global economy. However, with few important pieces of news expected, Greek Government meeting and the Fed, it would be wise that you remain mostly in cash and then decide which side or risk to accept.