QE2 'news' saw little reaction in the bond market with the yield curve largely unchanged. Despite an initial volatile reaction, there was also little net result in equity or currency markets. The biggest reaction was in investor sentiment which has now spiked to a higher level of bullish consensus than during the all-time high of stock prices (Oct. 2007). So while expectations of a continuing rally have never been higher (increasingly supported by lagging economic fundamentals), various technical and sentiment indicators show a very different picture.
Central bankers can flood the market with liquidity but they can't force people to borrow and they can't force banks to lend (as we've already seen in Japan and as we're seeing again with a falling money supply). The underlying bear market in social mood will determine the larger degree in market direction, not governments or central banks. The Fed is merely pushing on a piece of string - which will soon become apparent as deflationary forces intensify.
