EmailThe impressive rally yesterday was fueled by expectations that the Fed will take action to provide liquidity to stimulate the economy. S&P futures suggest that the rally will continue this morning.
Previous rounds of Fed quantitative easing (QE) are associated in the minds of many investors with an improvement in the stock market. Even the hint of the third round of such action was enough to prompt demand for stocks, which sent the shorts running for cover. In such easing, the Fed buys federal debt instruments in the open market. This creates credit that in effect monetizes the federal debt. To critics, this is "printing money."
Regardless of the long-term policy implications, the immediate impact is to increase demand for financial assets. It (hopefully) reduces the risks to the economy and the stock market.
The stock market remains heavily dependent on political statements, expectations, and action rather company fundamentals. This time, at least, the effect has been positive.
Other political actions which have helped boost the stock market this morning include an interest rate cut by China. Hopes of European central bank action to address the banking crisis in Spain, which helped boost the stock market yesterday, are also evident today. European stock exchanges are up over 1%.
New claims for unemployment for the week ended June 2 fell to 377,000 from 389,000 the prior week. Not a major move and in-line with expectations. More importantly, Fed Chairman Bernanke testifies before Congress today at 10:00 ET on the economic outlook. His statements will be parsed to assess whether or not another round of quantitative easing is indeed on the way.
Founder and Chairman, Briefing.com
