Weekend Update October 31

ABSTRACT: The Federal Reserve officially ended its asset purchase program on Wednesday, although their outlook for a “considerable time” before the federal funds rate is raised remained largely unchanged. U.S. markets made a positive reversal this week, pulling the global markets upward along with it. With the recovery of stocks, precious metals were battered to fresh lows.

GOVERNMENT & POLICY

Farewell, QE (At Least Until After We Vote)

At long last, the Federal Reserve’s quantitative easing program has come to end. Following the meeting of the FOMC on Wednesday, the committee’s announcement about the conclusion of its asset purchases gave a more hawkish outlook for the economy than most expected.

There’s a reason for this, as it turns out.

With the midterm elections less than a week away, the Fed is probably being very careful not to upset the markets in any way.

As much as anyone may like to believe that the Fed is completely insulated from American politics, this is simply not the case. When an FOMC member makes a statement, it is not merely investors who try and read the tea leaves; the comment typically makes headline news, because the implications of the Fed’s monetary policy have political ramifications, as well.

So, for the time being, that renders the Fed temporarily apolitical. Ahead of the FOMC announcement, there was plenty that remained up-in-the-air, unresolved. Despite the encouraging economic data of the last several months that seem to point toward a strengthening U.S. recovery, inflation expectations remain at their lowest levels since October 2011, three years ago. Wasn’t it just a few days ago that St. Louis Fed President Bullard was grabbing the media’s attention by suggesting that more stimulus measures ought to be taken, and everyone was wondering aloud, How long before we see QE4?

It is still unclear whether or not more quantitative easing is coming down the pipeline from the Federal Reserve. For now, it seems, more attention is being directed at when there will be an end to ZIRP, the Fed’s policy of keeping interest rates near zero. Dallas Fed President Fischer has said he doesn’t expect rates to significantly rise until the end of 2016, while most expectations for a rate hike generally target sometime in Summer 2015.

Nonetheless, whatever stability and atmosphere of abating concern the Fed projects ought to be taken with an even larger grain of salt than usual. Any optimism the Fed expresses leading up to the November midterm elections can quite easily be reneged after the political process has run its course.

For now, QE is over in the United States. How long that lasts will become a much thornier question after November 4th.

MARKETS

Turnaround Swift for Markets This Week

Following a somewhat prolonged period of weakness in the markets that was beginning to look like a bona fide correction, the winds changed directions this week as the stock markets caught fire, erasing their recent losses.

The Dow Jones Industrial Index had its best week in 21 months, rising 2.38% from Monday’s open to Thursday’s close to trade comfortably above the 17,000 mark. This was in spite of a Wednesday spent in the red that broke a four-day winning streak for the Dow. The S&P 500 and the Nasdaq trended the same direction, as Tuesday was the big moving day: each of the indices gained over 1%, wiping out the dramatic downturn that occurred at the beginning of the month. Data released this week also showed that three-quarters of the companies traded on the S&P 500 saw their earnings beat expectations for the third quarter, which is far above the typical proportion. For all of its recent volatility, the Dow Jones is still up 5.66% on the calendar year.

Facebook reported a 3Q revenue increase of 59%, exceeding Wall Street’s expectations for the fourth consecutive quarter. Shares of the social media giant are up 47% so far this year, but growth projections for next year are being cut back on the news that Facebook plans to increase its spending considerably during 2015. Visa also boasted a solid earnings report, helping the company’s stock surge 10% on Thursday. Elsewhere on the exchanges, stock in the venerable Madison Square Garden rallied this week on rumors that the company may be splitting into two.

The dollar was down slightly ahead of Wednesday’s FOMC announcement, and then was the beneficiary of the ostensible end to quantitative easing, with the DXY dollar spot index climbing toward 87.0, its highest reading in more than four years. The strength of the dollar has been pressing crude oil lower still. Oil prices have dropped 25% since this past June, signaling an entrenchment in a bear market.

Not all the economic news was good this week, however. Despite lower mortgage rates, existing home sales were flat for September, as demand for housing is not picking up with young professionals in the States. The home ownership rate is currently at a 19-year low. Durable goods orders came in lower than analysts’ predictions while the U.S. services PMI fell below expectations to a six-month low; yet, consumer confidence in the U.S. was actually at a seven-year high.

With the seemingly indomitable rise of the dollar, precious metals were punished this week, with silver, platinum, and gold all tumbling to yearly lows. After closing about 1% lower on Wednesday, gold and silver plunged even further on Thursday, as silver dropped below $17 and gold settled down near $1,200. Friday morning saw even bigger losses, as gold fell further to about $1,166 and silver even dipped beneath the $16 threshold. Silver has been unable to break out of its slump, consistently trending downward since peaking above $21.50 back in July. Platinum has been free falling, sitting at just below $1,227 on Friday morning. This represents its lowest trading price since the onset of the financial crisis in 2008. Palladium was trading near $788 on Friday; although far off of its yearly highs above $900, palladium has shown the least weakness of all the precious metals recently.

GEOPOLITICS & WORLD EVENTS

News & Notes From Abroad

Leftist incumbent Roussef wins re-election in Brazil; Brazilian stocks tumble 6% to seven-month low.

Chinese gold imports through Hong Kong in September were the highest on record in 5 months. Meanwhile, China’s biggest bank is experiencing a jump in its holdings of nonperforming loans (essentially, bad debt). Home prices also fell in 69 of 70 Chinese cities.

The Swedish central bank cuts its lending rate from 0.25% to zero, drinking the ZIRP Kool-Aid.

The Swiss gold referendum is still set for November 30; like the IndyRef movement in Scotland, the initiative seems doomed to come up just short.

Russia finally agrees to terms on a gas deal with Ukraine. The Russian central bank also adds the most gold to its reserves in a single month since 1998.

A LOOK AHEAD: Early next week is all about manufacturing data, as the PMI Manufacturing Index and the ISM Manufacturing Index will both be released on Monday, while factory orders will be announced on Tuesday. After a tremendous week for stocks, one can hope the markets avoid being spooked following Halloween this year!

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