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Dow ends week down 0.5% despite a surprise from the Fed

Posted on 29 January 2012 with 1 comment from readers

Even another 18 months of low interest rates from the Fed could not prevent the Dow Jones closing 0.5 per cent down last week, while the S&P 500 just scraped a 0.1 per cent gain.

Worse than expected US new homes and GDP data explained the immediate fall. But the euphoria of the New Year seems to have largely evaporated on Wall Street.

Fed handout

For investors news that the Fed is to keep interest rates low for the next three years ought to be a cue to buy equities that have much higher dividends. Why then did they sit on their hands last week?

The headwinds blowing from Europe and Iran are to blame. Iran has threatened to stop selling oil to Europe as soon as this week in response to an embargo scheduled for July.

At the same time the Greek debt crisis is entering a final lose-lose phase. Banks are being required to make 80 per cent write-offs against privately held debt or trigger CDS insurance covering the full amount. Either is a huge and costly credit event.

The UK and eurozone are also about to enter a double-dip recession that started in Q4. Only a massive cash injection from the ECB before Christmas has prevented a meltdown in the regional banking sector with inter-bank lending still largely frozen up.

Safe haven?

The US stock market is benefiting as a comparative safe haven. But share volumes are very low and not at all consistent with a rising market. This lack of volume, momentum and high prices has led veteran market analyst Jo Granville to conclude that the Dow will fall 4,000 points this year (click here).

In the Gulf States the Dubai Financial Market gained more than five per cent last week and the Saudi Tadawul is also up 1.3 per cent in the past four days. Investors do not appear concerned about the local contagion from the European stand-off with Iran.

Stocks in the UAE in particular are rallying from very low levels, however, and confidence is extremely fragile. Bad news from the eurozone would quickly reverse the impact of good news from the Fed.

Facebook filing for its IPO next week will probably prove to be the classic top of the market event. Everybody wants it to happen even though the market direction is changing underneath them.

Posted on 29 January 2012 Categories: Banking & Finance, Bond Markets, GCC Stock Markets, Global Economics, US Dollar, US Stocks

1 Comment posted by readers:

Comment by obewon - 29 January 2012

@ Ed: “good news from the FED.” Really? You probably meant to say ”supposedly” good news from the FED.

”Take on Greater Risk, Oh, America:
Last week, the FED made it perfectly clear that, in addition to holding interest rates at zero for the next 3 years, they have “targeted” an inflation rate of 2%. History shows that the FED always “overshoots” on their inflation estimates. Translation: strive for 4% inflation, while trashing the dollar in the “currency race to the bottom”. So they’re trying their best to spook the American public into putting their money into very risky investments (e.g. stocks and bonds) and go into a “buying frenzy.” As Caroline Baum stated in an excellent Bloomberg commentary, “This is a Dramatic Shift where the FED is encouraging risk . . . and trying to placate (or perhaps “manipulate”?) the bond market.”

This psychological manipulation will surely backfire; Caroline Baum’s analogy, borrowed from a Milton Friedman phrase, is that the FED folks are “Fools in the Shower” that will result in a good scalding. Go here for a great read:
Title: Fools in the Shower
Link: http://www.bloomberg.com/news/2012-01-26/-fool-in-the-shower-to-give-fed-a-good-scalding-caroline-baum.html

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