Risk as Fed pumps out $600bn

Wall Street looked set to join in the stock rally. On November 3 the Fed said it would spend $600bn buying longer-term Treasury bonds through to the end of next June as part of a renewed quantitative easing (QE) programme.

This was a little more than expected, but not enough to spook markets with worries about a worse-than-anticipated US economic picture.

“The result was slightly pleasantly surprising,” said Jonathan Schiessl, investment manager at wealth managers Ashburton in Jersey. “The risk trade is back on.”

The trade, which has been running on and off since QE was first anticipated in late August, essentially involves buying emerging markets for their better growth prospects and potential currency appreciation.

But stocks in general also benefit because of the impact of a huge wave of liquidity into the financial system.

MSCI’s all-country world stocks index was up 1.2 percent on the day at new two-year highs and within reach of its levels just before the collapse of Lehman Brothers. MSCI’s emerging market index gained 1.1 percent.

Investors were also ploughing into traditionally more risky emerging market sovereign debt. The yield spread between emerging market debt and U.S. Treasuries as measured by JPMorgan narrowed to levels last seen nearly three years ago.

Developed market stocks were also much in demand. The pan-European FTSEurofirst 300 was up 1.3 percent and Japan’s Nikkei closed up 2.17 percent.

The move to QE also came as global manufacturing activity has accelerated for the first time in six months, creating a situation in which an already improving world economy has been given a sharp monetary stimulus.

Dollar dumped
The main “victim” of QE is the dollar which is effectively devalued by the printing of new money to buy the $600bn in assets.

The dollar was down sharply, hitting a 28-year low versus the high-yielding Australian dollar, and losing around three quarters of a percent against a basket of major currencies.

The Fed’s commitment to purchases of Treasuries, implying low funding costs, brought into focus an expected increased use of the dollar in carry trades, in which the US currency is used to fund purchases in commodities, emerging markets and higher-yielding currencies.

The euro traded at $1.4226, up around 0.6 percent on the day, having touched a nine-month high at $1.4243.

Euro gains are being restrained by concerns over eurozone debt, particularly in Ireland and Greece.

Eurozone government bond yields rose as investors pondered the impact of US QE on inflation.