U.S. equity markets faced the long awaited Federal Reserve meeting on Wednesday, and digested the latest election results during what turned out to be a relatively stable session in the markets. The Dow, Nasdaq, and S&P 500 all rose modestly in today’s trading, with the Dow posting a gain of 0.2% and the S&P 500 jumping 0.4%. Commodity markets finished mixed; gold fell slightly but oil continued its surge higher as the important commodity finished ahead of the $85/bbl. mark. Meanwhile, bonds saw their yields drop modestly as anticipation grew over Federal Reserve purchases which could help to increase bond prices and send yields even lower in the coming months.
In early trading, election results weighed on the markets after the Republicans regained control of House of Representatives and made large gains in the Senate. Neither development was much of a surprise, which meant markets quickly turned their attention to the all-important Federal Reserve policy meeting. At that meeting, the Fed officially announced its widely expected second phase of QE by pumping close to $600 billion in the markets in an attempt to stimulate economic growth and job creation. The plan calls for about $75 billion a month in bond purchases from now until June 2011 in a 10-1 FOMC vote. Most of the buying will be heavily concentrated in medium-term securities such as 5 and 7 year notes; only 6% of the Treasury securities will mature in more than ten years. “People were expecting a much more spread out execution of both long- and short- term securities, instead of just short-term,” said Michael Cheah, a bond fund manager at SunAmerica. “So the knee-jerk reaction to the fact that the Fed is not buying as much of the 10′s and 30′s is sell.”
The ETFdb 60 Index inched higher by 2.11 points, or 0.2%. The small gain came as winners outnumbered losers by more than three-to-one and volume hit its highest level of the week in the wake of the Fed’s decision.
One of the biggest gainers on the day was the iShares FTSE/Xinhua China 25 Index (FXI), which gained 2.1% in Wednesday trading. These large gains came as the World Bank upped its growth forecast for the country by half a percent–up to 10% a year–on the back of a strong performance in the export sector. Investors also bought up Chinese shares in hopes that the massive bond buying campaign would push investor capital into emerging markets as a way to gain excess returns in the near-term. “Liquidity in whatever form is good for the market, but too much will push up prices and start to create stronger inflationary pressure,” said Song Seng Wun, a Singapore-based regional economist at CIMB-GK Research. This speculation helped to drive up demand for FXI especially after the short-term nature of the bond buying program was announced, further spurring demand for emerging market equities [see technicals of FXI here].
One of the biggest losers in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which fell by 6.1% on the day. As we predicted in today’s ETF To Watch article, VXX was a big mover thanks to the election results and the Federal Reserve’s QE program. VXX traded close to 50 million shares on the day, more than double the fund’s daily average of 24 million, with the bulk of trading coming during the final two hours after the Federal Reserve announced its plans for the market. Today’s steep drop continues the recent downturn for VXX and now pushes the popular ETN down 26.6% over the past quarter and down 75.3% over the past 52 weeks [see more charts of VXX here].
Disclosure: No positions at time of writing.