Market wrap: Australian shares are likely to open modestly lower after the promise of further U.S. monetary easing prompted wild swings in equities, gold and the U.S. dollar overnight.
The local December SPI futures contract this morning closed 8 points weaker at 4640 after Wall Street finished mixed, gold soared and the U.S. dollar and yields on U.S. treasuries plunged.
U.S. stocks traded in the red for most of the day but rallied late in the session after the Federal Reserve promised to ease monetary policy to support the flagging recovery. The Dow spoked 110 points in a few minutes before falling nearly as fast to close 7 points or 0.07% stronger. The S&P 500 ended 0.26% weaker and the Nasdaq lost 0.28%.
The monthly Federal Open Market Committee statement said, "The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." The statement reiterated that the benchmark lending rate will remain in a range of zero to 0.25% "for an extended period".
The Fed statement overshadowed news earlier in the session that construction of new U.S. homes improved to a four-month high in August.
"Investors are digesting the Fed's announcement and trying to figure out where to go," the chief investment officer at Fifth Third Asset Management in the U.S. told Bloomberg. "On the one hand, you have the Fed not saying anything so extreme and reiterating it will be ready to act in case necessary. On the other hand, you have the Fed also recognising that macro trends are negative."
The U.S. dollar dropped like a stone after the announcement. The dollar index, which measures the greenback against six major currencies, was recently down 1.1% and close to its lowest level since early August. Treasury yields hit a record low on speculation the Fed will buy government debt to prop the economy.
Precious metals were the chief beneficiary as U.S. investors chased a hedge against inflation. The spot gold price soared to a new record above $1,290 an ounce minutes after the Fed announcement and was recently trading at $1,287, $8.50 higher than Monday's New York close. Spot silver was also up more than 1%.
Oil traders who expected the Fed statement to include specific actions dumped crude following the announcement. Crude futures were recently down $1.36 or 1.8% at $74.82 a barrel.
The Fed statement came to late to affect a downbeat session in London. Copper fell 0.6%, aluminium 1.1%, lead 1.1%, nickel 3.2%, tin 2.2% and zinc 1.6%.
European markets were initially boosted by a successful Irish bond auction but gave up gains in jittery trade ahead of the Fed announcement. Britain's FTSE dropped 0.47%, Germany's DAX 0.3% and France's CAC 0.1%.
TRADING THEMES TODAY
PRECIOUS METALS: The U.S. Federal Reserve offered another reason to buy gold and silver miners overnight by signalling that it will buy government debt, which is likely to depress the U.S. dollar and encourage holders to seek hedges in other forms. The reaction in the gold and silver markets was instantaneous. Both rocketed as the U.S. dollar dropped through a trap-door. The fundamentals for our gold/silver miners continue to improve.
AVB: It's rare that I single out a specific stock but Avanco Resources will certainly be a theme on this forum today after yesterday's 157% rise. That extraordinary gain flags that enthusiasm for the small cap or speculative end of the market is running hot once again and it's a good time to be alert to similar opportunities. To newcomers to trading, please tread carefully. Although fortunes can be made on runaway trains like this one, there are always traders who get caught buying at the top. Good luck to holders today. (I don't hold as yet but will watch for opportunities.)
ECONOMIC NEWS: The local monthly leading index is released at 10.30 am. A relatively quiet night in the U.S. includes the house price index and crude oil inventories.
