Central Banks Part 2: The ECB

Last meeting: December 2, 2010

Prior to last: November 4, 2010

Next meeting: January 13, 2011

Chairman: Jeane Claude Trichet

Currently, ECB's monetary stance is accommodative. Apart from leaving the main refinancing rate at 1%, the central bank delayed exit of non-standard measures and announced in December to keep providing unlimited liquidity to the market through Q1, 2011. The ECB extended the full allotment of the 3-month tender for a quarter. The 3-month LTRO (Long-term refinancing operation) will be conducted on January 26, February 23 and March 30 as fixed rate tender procedures with full allotment. In order to restore market confidence in the face of the sovereign crisis, ECB started buying government bonds in May under the Securities Market Program (SMP). As of December 24, the value of the accumulated purchases under the SMP was EUR 73.5bn with most of it spent during the first 3 weeks of the program. Although the ECB tried hard to convince the market at the launch of the program that it's not QE as all bond purchases would be sterilized, it turned out that only 60.78B euro was drained via 7-day term deposits, leaving almost 13B euro in the money market. We believe this is negative for the euro as the SMP is indeed no difference from QE in the US and the UK.

There have been talks that the ECB will step up liquidity provision and purchase peripheral debts. There's chance for the ECB to expand the scope of it purchases if the situation deteriorates rapidly as there is no limit on the duration or magnitude of the SMP. Should this materialize, the euro will get hammered as investors punish money-printing (like selloff in USD for most of the time in 2010).

ECB's decision in the coming year will be very challenging and opinions from policymakers will be more diverged. While peripheral economies welcome further easing, Germany should object the measures as tolerance of accommodative monetary policies for a prolonged period of time would mean higher inflation for Germany and this would damp the country's competitiveness.

Central Banks Part 1 : The Fed

Last meeting: December 14, 2010

Prior to last: November 2-3, 2010

Next meeting: January 25-26, 2011

Chairman: Ben Bernanke

Meeting Statement

At its last meeting on December 14, the FOMC maintained the “exceptionally low” for an “extended period” language on the Fed Funds rate, keeping it unchanged at a target range of o to 0.25%. The Fed also noted that it intends to continue its planned $600bn of Treasury purchases, $75bn per month as announced in the November meeting up to June 2011. The Fed also cautioned that it would monitor and evaluate the size of the program on an ongoing basis.

Longer-term inflation expectations were seen as stable but underlying inflation has continued to trend downward.

For the nth meeting now, Kansas City Fed President Thomas Hoenig voted against the policy adopting the view that the economic recovery means that an expansionary monetary policy could spark extremely high levels of future inflation that could destabilize the economy.

Prior meeting minutes

Many market participants worried whether the Fed will complete its stated $600bn in Treasury purchases, citing future inflation as a problem. The Fed minutes from the November 3^rd meeting seem to have clarified its strong commitment to this policy. There are in fact reasons to believe that the Fed has potential to do more if required. The minutes from the Fed meeting included an FOMC videoconference on October 15, 2010 at which the members discussed a several possible easing steps, with the announced program described as an “incremental approach” as opposed to the much talked about shock and awe approach. This terminology only suggests that the stated amount of $600bn is very likely seen as a first installment. Given the Fed’s determination towards easing, the economy would need to improve beyond its forecasted 3.3% level, accompanied by a gradually declining unemployment rate. Such developments seem highly unlikely in the next three to six months.

Outlook

The Fed is still facing extremely sticky unemployment, falling inflation measurements, and extremely low levels of household spending and consumer confidence. It seems highly likely that the Fed will continue and complete its planned QE2 program. I do not think a QE3 will take place. The recovery has been slow, but there is recovery nevertheless. The extension of the fiscal easing should make corporates have a more clear planning horizon which should help staffing and capital budgeting decisions.

I don’t see the Fed tightening happening anytime in 2011, even though the market seems to be pricing in a tightening beginning Q2 2011, as implied by the Eurodollar futures for March and June 2011. A tightening of monetary policy in 2012 Q1 seems more likely. On the other hand, with an imminent fiscal tightening in 2012 or 2013 times ahead for the US seem extremely bumpy.

** The voting members rotate beginning next year. The only dissenter, Kansas City President Hoenig will not be a part of the voting team now. Kansas City, Cleaveland, Boston and St. Louis will be replaced by Chicago, Minneapolis, Philadelphia and Dallas. Minneapolis Fed President Mr Narayana Kocherlakota has some interesting thoughts which I hope to discuss here soon.

The Crisis in Bullet Points

How did this crisis happen? How could men earning tens of millions end up losing tens of billions? How could a Republican administration end up nationalizing the federal National Mortgage Association, the Federal home Loan Mortgage Corporation and the insurance giant, American International Group? Above all, how could a crisis in the American mortgage market precipitate not just an American recession but quite possibly a world depression? To answer these questions you need to understand at least six distinct though interrelated financial phenomena:

1. How so many American and European banks came to have such highly leverage balance sheets, in other worlds how they ended up owing and lending so much more money than their underlying capital bases;

2. How a whole range of different kinds of debt, including mortgage debt as well as credit card debt, came to be "securitized", or bundled together and then sliced up into different kinds of bond-like securities;

3. How the monetary policies of central banks came to be focuses on a very narrow definition of inflation, ignoring the potential hazards of bubbles in stock prices and later real estate prices;

4. How the insurance industry, led by the giant American firm AIG, branched out of traditional risk coverage into the market for derivatives, effectively selling protection against highly uncertain financial risks;

5. Why politicians on both sides of the Atlantic sought to increase the percentage of households that owned their own homes using a variety of inducements to widen mortgage markets;

6. What persuaded Asian governments, and particularly that of the People's Republic of China, that they should help to finance the US current account deficit by accumulating trillions of dollars in international reserves.

Recommend: The Ascent of Money, A Financial History of the World by Niall Ferguson

Trade Idea: Long September 2011 Euro-Dollar contract

The sell-off in the September 2011 Euro-dollar contracts after the latest FOMC meeting seems to wrongly price the beginning of the Fed’s tightening cycle. Prior to the QE2 announcement, the tightening was priced in close to the end of Q3 of 2011. This has changed dramatically with the tightening now being priced in close to the end of Q1 2011, as suggested by the March 2011 contract.

The announcement of $600bn in QE2 itself is a stance of easing which should have, if anything, pushed out the tightening cycle of the Fed. There are arguments suggesting that the sell-off was plausible since the Fed has a reasonably strong GDP forecast of 3.3% for 2011, which will probably be enhanced by the QE announcement. On the contrary, I believe the Fed’s tightening will more likely be determined by the unemployment rate. Interestingly, the Fed has revised up its unemployment forecast for Q4 2011 to 9% from 8.5% previously.

Many market participants worried whether the Fed will complete its stated $600bn in Treasury purchases, citing future inflation as a problem. The Fed minutes seem to have clarified its strong commitment to this policy. There are in fact reasons to believe that the Fed has potential to do more if required. The minutes from the Fed meeting included an FOMC videoconference on October 15, 2010 at which the members discussed a several possible easing steps, with the announced program described as an “incremental approach” as opposed to the much talked about shock and awe approach. This terminology only suggests that the stated amount of $600bn is very likely seen as a first installment. Given the Fed’s determination towards easing, the economy would need to improve beyond its forecasted 3.3% level, accompanied by a gradually declining unemployment rate. Such developments seem highly unlikely in the next three to six months.

Of course, it has to be acknowledged that the QE2 program got off to a rough start due to global political developments, market volatility and the Fed’s internal dissent. To address the latter, the “meeting opened with a short discussion regarding communicating with the public”, and the members supported a review of the FOMC’s communication guidelines with the aim of ensuring that the public is well informed about issues in monetary policy, while preserving the necessary confidentiality of policy decisions, until their scheduled releases.

Given this context, I recommend going long the Eurodollar contract for September 2011 expiry.

September 2011 contract

Implied short term rate: 0.705%

March 2011 Contract

Implied short term rate: 0.525%

Current Fed funds target rate: 0% to 0.25%

Bullion Dollar Investment

I could think of a few reasons why gold is invested in and why I think this pullback may not be a big one and why gold is going much higher, and probably sooner than many on Wall Street believe possible.

Reason #1: Europe's Debt Problems Haven't Gone Away. The United States isn't the only country with a debt crisis. The euro zone has its own government debt/banking crisis, a crisis that nearly sank the euro mere months ago, as Portugal, Ireland, Italy, Greece and Spain teetered on the brink of insolvency.

Europe was able to paper over the problem for a while, but now we're seeing Irish 10-year spreads moved to 5% and Greek spreads to 9%. Investors are starting to bet those governments will bust their budgets.

So, worried Europeans are (again!) moving into the safety of the hard currencies — gold and silver. It's a trend that could continue through December as Greece holds elections and Ireland wrestles with a new austerity budget plan.

Reason #2: The Debt Crisis Is Global. The Wall Street Journal recently reported that the 15 most advanced nations of the world, including the United States, will have to borrow a whopping $10.2 billion in 2011. The money is needed to repay maturing bonds and finance budget deficits.

Japan is in worse shape financially than the United States. But the US is giving the Japanese a run for their money. The Federal Reserve has committed to buy an additional $600 billion in U.S. government debt over the next eight months.

This raises another red flag. The International Monetary Fund (IMF) warns that the chances that investors will balk at lending to governments "remains high for advanced economies."

If the risk of government default is rising, where do you hide out? Gold and silver are a good place to start!

Reason #3: Central Banks Continue to Buy. You know who's not worried about the high price of gold? Central banks. They continue to snap up the yellow metal; obviously they're banking on higher prices.

There are two parts to the central bank/gold equation: Buying and selling. On the sell side, central banks and the IMF sold about 94.5 metric tons of gold in the year that ended last month. Most of this was IMF gold. And the total was down a whopping 40% from a year earlier!

On the buy side, we know that countries including Russia, Venezuela and India are buying a lot of gold. In fact, Russia has been steadily building its stockpile of gold all year, buying it every month. It started with 16.7 million ounces in January and just added another 500,000 ounces in October to hit 19.5 million ounces.

Even developed nations are buying gold — France's gold as a percentage of its reserves rose from 42.5% to 63.3% and Portugal jumped to 83.7% in 2009 from 39.9%. And China is probably buying a lot of gold, though we won't know until long after the fact.

Reason #4: Investors Are Piling Into Gold. Central banks aren't the only ones not deterred by higher gold prices. Investors large and small aren't blinking either. The World Gold Council estimated late last month that gold holdings in ETFs hit a new record in the third quarter.

What's more, a new gold ETF just made its debut in Hong Kong. The Value Gold ETF will hold its gold locally, and offers Asians unnerved by the global currency and debt crises a new way to hedge their portfolios.

Reason #5: The World Starts to Shift Away from the U.S. Dollar. If you watched my video Tuesday, you know that I have turned short-term bullish on the U.S. dollar. But that's just a zig-zag in a long-term bear market for the greenback.

The storm clouds gathering over the U.S. dollar are ominous. French President Nicolas Sarkozy recently emerged from a meeting with China's leader Hu Jintao, and called for a new global monetary system.

Since the current system is based on the U.S. dollar as the reserve currency, this move is a direct assault on the dollar's primacy. And since gold is priced in dollars, if the dollar is going down, gold will go up.

In fact, World Bank chief Robert Zoellick said in an article in the Financial Times that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of a bigger reform of the global financial system.

Such a move would be an end to the current global regime which is based on the dollar as the world's reserve currency. That would cut the hamstrings on the U.S. dollar.

So ask yourself, how can both the euro go lower and the U.S. dollar go lower? The answer is that both are going to go lower against hard currencies — gold and silver.

Reason #6: Gold Is Running Rings Around the S&P 500. The S&P 500 is up nearly 9% so far this year, which seems pretty good. But that's only because the S&P 500 is priced in dollars, and the U.S. dollar's big trend is lower. What happens if you price the S&P 500 in gold or silver?

Thank you Unconventional Wisdom

Hari Patti

Currency games

A big debate between investors, officials and financiers has been how much of the QE2 by the Fed is an attempt to devalue their currency. Some say that it is the primary (hidden) agenda of QE2. Others (and the Fed itself) believe it is a by-product of QE2 which is essentially aimed at spurring (domestic) economic growth.

One of the primary reasons why the dollar has been under pressure in the recent months has been the diversification of central banks (mostly in Asia) away from the USD. Historically these banks had been accumulating dollar reserves to anchor the appreciation of their own currency.

What is interesting is that if the Fed is really trying to devalue their currency by QE2, it doesn’t seem to be working. Ever since Bernanke’s Jackson Hole speech in August which was the first seemingly strong hint for a QE2, the dollar index, which tracks the USD against a basket of 6 leading currencies, fell more than 10% from its peak. Post the $600bn QE2 announcement, though, the dollar has rallied nearly 3%.

There is of course, Ireland and other Eurozone worries to a large extent to blame for that. But even then, I doubt the impact of QE2 being able to depreciate the dollar. The conventional wisdom of the dollar devaluing due to QE may not be applicable in this world…where if “I’m in bad shape, there are others who are in even worse shape.”

There could be other possibilities nevertheless. You buy the rumor and sell the fact. Markets overreact to rumors of QE2 and price in more than what is going to come, unknowingly.

If the European crisis were to worsen further, the dollar could gain more strength. This will only be amplified by emerging market countries putting restrictions on capital inflows. That may not do much to ease concerns in emerging markets. It does not mean that the dollar is going to experience a sustained rally; it may very well face weakness as the Fed continues its asset purchases for the next seven to eight months. Nevertheless, if domestic data continues to show improvement (nonfarm payrolls, consumer confidence Michigan index) the worst of the dollar slide may just be over.

Konnichiwa!

Thats Japanese for "Hello" or "Good afternoon"

This week's news belonged to the land of the rising sun. The Bank of Japan did what it had been scaring the markets about for the first time in 6 years.

The BoJ, followed the Bank of China and intervened the currency markets selling an estimated Yen 2 trillion ($23 billion) on two consecutive days as the currency reached a low of 82.88 vs. the USD. As a result the yen depreciated over the last week closing near 85.8 vs. the dollar.

Rationale for intervention

Reasons for the intervention are largely quoted as protection of the country's exports after the currency has seen large appreciation over the past few months primarily due to China increasing its holding of the Yen in an attempt to diversify away from the dollar. The move accentuated by some safe haven flows.

The Political Angle

The intervention took place the very next day after Prime Minister Nato Kan had won the challenge thrown at him by opponent Ichiro Ozawa who had claimed currency intervention if brought to power. By this move, PM Kan showed in a way that he too "can" take decisive action against the "threat" seen on Japanese exports.

Possible Impacts

Currency intervention by a G7 country is a pact with the devil. Especially when it is not supported by other major central banks. Moreover, this makes it extremely difficult for the US to negotiate a stronger remnibi with China, who can now just take the Japanese example as a point for protest. Moreover it is not quite clear if currency appreciation will really make a large difference to exports from Japan as up until now Japanese exporters have pretty much been 'reaping' money.

In any case the future actions of Japan is worth to keeping an eye on. My guess is even though it may not seem very logical or "purely" political, its not easy to prove that Japan is not serious about intervention. The last time the BoJ intervened was a multiple set of actions lasting 15 months starting June 2003. Who's to say thats not whats going to happen again!

Let's try to make some money!

View: Long on the Japanese yen with some constraints

Rationale: Fundamental factors like China increasing yen holdings, flight to safety flows, momentum in the currency. Currency intervention being the constraints.

Product: Call option on the Yen with strike at 86 and knock-out at 82.

Product Rationale:

1. Long position on yen through the call option

2. Knock-out at 82 makes the option expire if USDJPY goes below 82. This significantly cheapens the option premium as we forfeit all upside beyond yen appreciating over 82.

Macro Support

1. Official talk of currency target threshold of USDJPY at 82. "We will not permit precipitous moves in the yen", said the Finance Minister.

2. The last time BoJ intervened, it lasted 15 months with multiple interventions from June 2003 to September 2004.

3. Political pressure from Ozawa likely to continue.

4. General tendency of the yen to appreciate

Fed Talk

For every meeting from now till the economic data shows significant upside, the FOMC will be facing the same question. Do we act now? Do we hold off?

The next meeting is due on September 21, 2010 and the Fed is most likely going to be inclined to wait. One suspects that the tone of the Fed would become slightly dimmer. But the likelihood of it embarking on a new round of quantitative easing as was hinted by Bernanke in his speech at Jackson Hole, seems dim. Even with dismal Home sale numbers and revised Q2 GDP of 1.6% (from 2.4% previously), the hurdle required for Bernanke to make such a move is absent.

There has been little to suggest a significant deterioration since then: private sector payrolls rose by 67,000 in August and manufacturers made positive noises in the most recent Institute of Supply Management survey. Given the Jackson Hole signal, to make a big move in September would risk confusion in the markets.

There is also a strong suspicion that the latest growth number overstates the weakness of the economy. An apparent surge in oil imports alone subtracted more than one percentage point from growth in the second quarter in spite of little sign that the US was actually consuming more oil.

It does not follow, however, that the FOMC will continue to sit on its hands as long as the data do not get any worse. The committee’s outlook is that growth will accelerate to 3 or 4 per cent in 2011 – well above its long-run trend. Any sign that the economy is not speeding up again in the coming months would be a “significant deterioration” to many FOMC members, prompting action.

A reason to act immediately would be a further loss of market confidence in the outlook for growth and inflation but Mr Bernanke’s Jackson Hole speech seems to have had a soothing effect.

There is one other argument in favour of a September move, although Fed officials insist that it is irrelevant. The Fed’s subsequent meeting ends on November 3 – the day after midterm elections in which the Democrats might lose control of Capitol Hill – and it could be politically uncomfortable to make a big change to monetary policy the next day.

If and when the Fed does decide to ease policy, there is a fairly strong consensus on the FOMC that further quantitative easing is the way to do it.

Some form of “QE2” is likely to be one of the policy options put to the September meeting and the committee may debate the form it would take were it needed.

Momentary exuberance?

Highlights

The markets saw dramatic movements last week. US Stocks extended losses on Tuesday sending the Dow below the psychologically critical 10,000 price mark for the first time in 2010. This was after a bigger than expected slump in home sales fuelled concerns that the economy may head back into a recession. Fears accentuated after S&P cut the sovereign Ireland rating one notch down to AA- with a negative outlook on concerns that the cost of supporting its banks is rising at a fast pace. US 10y yields slid to the lowest since 2009, below 2.5% at one time after the durable goods report showed a worse than expected print. Bunds advanced even after German business confidence unexpectedly rose in August.

The dismal week turned upside down after Bernanke’s speech at Jackson Hole. The S&P reacted with a 1.6% jump on Friday closing above 10,150. The 10y Treasury yield selling off dramatically to near 2.64%. Chairman Bernanke assured the markets that the Fed intends to do “all it can” to ensure a US recovery.

Is this the “I get knocked down, but I get up again” phase or is it just a “momentary lapse of reason.”

Bear Roubini, Bull Bernanke

Nouriel Roubini, the New York University economist who predicted the global financial crisis, said U.S. growth will be “well below” 1 percent in the third quarter and put the odds of a renewed recession at 40 percent.

“With growth at a stall speed of 1 percent or below, the stock markets could sharply correct, and credit spreads and interbank spreads widen while global risk aversion sharply increases,” he said. “Thus a negative feedback loop between the real economy and the risky asset prices can easily then tip the economy into a formal double-dip,” he said, referring to two recessions in a quick succession.

Bernanke, on the other hand expressed confidence in the Fed’s ammunition to handle a double dip possibility. “The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do,” Bernanke said in a speech at the Fed’s annual conference in Jackson Hole, Wyoming, detailing choices that include renewed large-scale securities purchases.

Economics

Purchases of existing homes plunged 27.2 percent to a 3.83 million annual rate, figures from the National Association of Realtors showed today in Washington. The pace compares with the median forecast of a 4.65 million rate, according to a Bloomberg News survey.

The revised forecast for Q2 GDP came in slightly better than expectations of 1.3% but plummeted to 1.6% vs. the previous estimate of 2.4%. “It’s bad…but we were prepared for worse”, was the feeling in the market.

What’s behind the home sales data?

Sales of previously-owned homes, after a good run in March and April, slid in June before crashing in July. Sales last month were down 26% from one year earlier and 27% from June.

I suspect a large portion of this drop is due to the ending of Home-buyer tax credit of $8,000 in April. Clearly, temporary tax credits succeeded in getting buyers to change their behavior. But once the tax credits disappeared, so did the buyers. There is no reason to have signed a contract in May and not in April when you could have gotten an $8,000 tax credit.

What’s less clear is whether stimulus has done anything else to change demand. While mortgage rates continue to fall every week into record territory, the expiration of tax credits shows that housing demand is not much better than it was 18 months ago, when the market was in freefall.

Sure markets were to slide for a couple of months (May and June) after tax credit were finished. But the plummet of July certainly points to lack of structural demand. How long before we say that it not ONLY the lifting of tax credit that has caused demand to fall? I guess may be a month more….max!

Double Bubble?

US Rates

St. Louis Fed President James Bullard’s speech on Friday caught much attention. Bullard furthered the dovish Fed sentiment stating that if economic developments suggested increased disinflation risk, the Fed might consider purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant. He also tried to balance his outlook stating that “continued expansion is the most likely course going forward.” Bullard told reporters on a more hawkish note that while he continues to have concerns with the “extended period” language, he did not dissent as a mark of respect to the Fed’s practices.

Employment

The job environment in the US came under some threat last week as unemployment claims increased unexpectedly to 500k, the highest level since November 2009. The report printed a number higher than the maximum forecasts of 42 economists surveyed by Bloomberg, which ranged from 460k to 495k. The claims number induced a response from President Obama, who noted an urgent need for congressional action towards cutting taxes and easing credit for small businesses.

Economics

The Philadelphia Fed’s General Business Conditions Index plummeted to negative 7.7, decisively worse than expectations of positive 7 and in the contraction mode. The latest reading is the worst since July 2009 and down from 5.1 last month, pointing towards a possible trend of sluggish growth, if not worse.

Bond bubble?

Over the last few weeks, there has been intense debate on whether we are witnessing a bond bubble as yields have reached within striking distance in all the sectors of the curve, having crossed lowest levels in some tenors.

I don’t think there is a bond bubble. Just because yields are at all time lows is not reason enough. I can’t find the reason for yields to be higher. Treasury auctions have performed well as suggested by all bid to cover ratios. Japan reported highest ever holding of foreign debt. Economic numbers have come out weaker than expected, inflation has been docile, and the Fed has left the “extended period” language unchanged while sending dovish signals all over. The stock markets too have continued to perform poorly.

More on the bubble babble

http://www.cnbc.com/id/38785166

Double Dip?

That’s the big question!

On the one hand we’ve had Goldman Sachs saying that the possibilities of a double-dip recession “is unusually high- between 25 to 30%- but we do not see double dip as the base case.”

On the other hand the US bond market disagrees. The economy has never contracted with the difference between short-term and long-term yields as wide as it is now. Though, the yields have also have never been lower than now! According to the Federal Reserve Bank of Cleveland, the 2y10y slope (now 211 basis points) signals a 15.5% chance of a recession in the next year.

Remember Quantitative Easing?

US Rates

Rates saw a dramatic rally last week primarily on the back of some significant policy announcements by the Fed. The US Central Bank suggested that it would re-invest the proceeds of more than $150bn from their investment in mortgage-backed securities into US Treasury notes and bonds. This is a clear change in policy stance from a few months ago, when the Fed was aiming towards a natural shrinking of its balance sheet. The Fed announced purchases of $18bn of Treasury bonds over the next month, much less than the average $50bn monthly purchases conducted last year as a part of the $300bn quantitative easing program. The purchases are expected to be in the 2 to 10y sector of the yield curve. Given that the Fed is reluctant to hold more than 35% of the market share in any one maturity, the pressure is mostly in the 5y to 7y intermediate sectors of the yield curve. The Fed also downgraded its economic forecast further accentuating the flight to quality move into Treasuries.

Yields on government bonds are now within striking distance of the all time lows seen in March 2009. The two year rate is already at an all time low near 0.6%.

Employment

This is after the prior week saw nonfarm payrolls for July decline by 131k vs. expectations of an increment of 100k. The only respite in the report was that most (if not all) of the job losses were from temporary jobs at the US Census. The employment rate, measured by the Household Survey held steady at 9.5%.

Currencies

In the obvious response, the US dollar faired quite well compared to other G10 currencies as investors moved to the shelter of US Treasuries. The Euro fell towards a three-month low in the 1.27 region. This move was also supported by the Q2 GDP report in the Euro area region which saw a robust growth of 2.2% in Germany on one hand while Greece was proven to be deep in recession with a negative growth of 1.5%. The market is set to re focus on the woes of the Euro area region.

What Lies Ahead?

One thing is certain; the next six to nine months are going to feel similar to the period from March to December 2009. The Fed is essentially elongating QE - at a smaller scale of course only because the economy is not in crisis mode. With an intent to buy $150bn of Treasury and an average of $18bn per month equates to 9 more months of wait and watch period. Whether the US goes into recession or not is difficult to say. Growth is going to be close to 0%! Be it is from the left hand side of the number scale or the right hand side. Well it’s not really surprising, what were the chances that the Fed would be able to pull-off an absolute smooth recovery in the first place. These obstructions were always on the cards.

With employment way above 9%, QE-like actions on the way, recession possibilities I don’t see the Fed hiking rates before this time next year, or perhaps even December 2011.