Fed Announces Operation Twist, Markets Sell Off
Markets immediately fell following Ben Bernanke’s anticlimactic announcement of an “Operation Twist”—a strategy used to bring down interest rates on long-term debt—while failing to promise any surprise stimulus injections to boost stocks higher.
Last week Dave Rosenberg summed up the situation well when he stated, “If Bernanke wants to juice the stock market, then he must do something to surprise the market. 'Operation Twist' is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires...It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday…If he doesn't, then expect a big selloff."
The fact no surprise announcement was made appears to be a realization on the part of the Fed that any further quantitative easing would now have either a neutral or negative effect on the overall economy as each dollar of debt translates less and less to economic productivity—a situation Barry Bannister termed the “Zero Hour”. (See image below)
Without the Fed surprising the market with new inflationary measures and the continued risk of global recession, it is not surprising to see oil, commodities, and copper to be breaking down in kind. Copper, by the way, usually a key indicator for global growth just put in a new low for the year—down nearly 20% from its peak. As you can see from the graph below, it recently broke below a 2-year support line going back to late 2008.
Same thing for oil, which also just recently broke its 2-year upward trend.
All in all, with the amount of negative data currently weighing on the economy along with major commodities breaking down, the markets may have some downside ahead. Also, without the Federal Reserve stepping in, it doesn't appear that there is much else out there to keep the markets afloat without a fundamental turnaround in the job market, housing market, manufacturing, and consumer confidence—a feat that will admittedly not happen overnight.
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