EmailLet's dispense first with the silly notion that the equity market sold off yesterday afternoon because the FOMC did not announce QE3. Sure, one can look at an intraday chart and cite the very coincidental timing of the retreat, but a distinction of causality needs to be made.
The policy directive was a catalyst for the selling but not the cause. It could not be the cause because so few people expected a QE3 announcement at this time. It could be the catalyst, though, because the release of the directive cleared a path to focus again on the unsettled state of the eurozone debt crisis.
If conditions deteriorate in such a manner, either at home or abroad, that the Fed’s dual mandate is threatened with downside risks that have become a reality, the Fed will likely institute another quantitative easing program.
This does not need to be stated explicitly in the directive. Historical precedent has written it between the lines of where it is said, "The Committee…is prepared to employ its tools to promote a stronger economic recovery in a context of price stability."
So, QE3 at this time is a no-go; meanwhile, the eurozone debt crisis is still going.
The latter was made clear this morning after Italy auctioned EUR3 bln of 5-year notes at an average yield of 6.47% -- a euro era record high -- versus 6.29% at the prior auction. Italy's 10-year note yield has bumped up to 6.70% versus 5.80% a week ago and 6.45% just before the EU Summit declarations on December 9.
The trend here, as well as in the weakening euro, has acted as a halting influence on the U.S. market this week.
That is proving to be the case again this morning as the S&P futures are trading 0.3% below fair value, indicating a lower start for the cash market.
Foreign equity markets haven't fared well today either. Most European averages are in the red, albeit with losses generally under 1.00%. The same can be said for the Asian markets, which continue to be saddled with concerns about a slowdown in China and a potential export drag from Europe's issues.
In other developments, reports indicate OPEC has agreed to a 30 mln barrel per day production ceiling for all 12 OPEC members. Crude futures are down 1.6% to $98.50 per barrel in the wake of that news.
We expect participation to be fairly modest again today in this touch-and-go market and for technical trading activity to be an influential driver of the action.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
