U.S. equity markets were flat for much of the day Tuesday, as investors were cautious ahead of the Federal Reserve meeting that ended in the afternoon. Once the meeting was over, equities surged briefly but then quickly fell back to opening prices as the Fed hinted at more easing measures in the near future. This news helped to send oil prices lower by close to 2% on the day and pushed gold up by $10/oz. to the $1,290 mark, another new record for the precious metal. Not surprisingly, currency and bond markets were in focus for much of the day with the dollar losing over one cent against the euro and falling to the 85 yen mark against the Japanese currency. Bonds yields also tumbled on speculation that the Fed would increase its buying of U.S. Treasurys, which would help to keep a lid on rates and send bond prices sharply higher.
The Fed went on to say that inflation remains below healthy levels and that it was ready to act to provide “additional accommodation” to boost markets. Since markets had not really deteriorated very much since the Fed’s meeting earlier this summer it was not compelled to act, although many believe that the bank will make a move at its next meeting on November 2nd-3rd. “It was a fairly strong statement from the Fed,” said Bruce McCain, the chief investment strategist at the private-banking unit of KeyCorp in Cleveland. “The bullish aspect is that the Fed is ready to provide additional money. That’s positive especially for those who feared the waning effects of the fiscal stimulus.”
The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, dropped 0.31 points. Trading was heavy both before and after the Fed announcement, with aggregate trading volume for index components approaching 850 million shares.
One of the biggest ETF gainers on the day was the United States Natural Gas Fund (UNG), which surged higher by 1.7%. This gain came as traders’ fears surged over the possible impact of a new storm off of the South American coast, which could threaten the gas producing regions of the Gulf. The storm is currently expected to approach the Yucatan peninsula and could turn north into the Gulf as a hurricane. “Obviously if there is a storm in the Gulf this late in the season it’s going to be a game changer,” said Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut. “It will catch a lot of traders that are not prepared for it.” [see more on UNG's fact sheet].
One of the biggest losers in the ETFdb 60 was the iShares MSCI Japan Index Fund (EWJ), which fell by 1.1% on the day. Today’s losses came as the Japanese yen resumed its strengthening against the dollar; the exchange rate is now approaching 85 yen to a dollar. This quick drop suggested to many that the Japanese intervention into the currency markets is likely to have a limited impact and could either force the Bank of Japan to intervene once again or let the exchange rate surge higher to the detriment of the country’s export industry [see technical analysis of EWJ here].
Disclosure: No positions at time of writing.