Markets dissapointed as FED`s Bernanke hints no QE3

Just as expected, no new news came out from Chairman Bernanke today, as he delivered his testimony to the Joint Economic Committee of Congress. He instead focused on reassuring financial markets that FED is ready to act in case of an European financial meltdown and plead against fiscal tightening. As an immediate result, gold plunged by $40 to $1592, and the S&P went down to $1321. Markets need their daily dose of stimulus talk Bernanke!

BoJ sprays markets with 10 trillion Yen of liquiditity and all I got was a lousy SL

The Bank of Japan announced more monetary easing today and pumped $128 billion into money markets in a move set to reverse the appreciation of Yen against other currencies. Copy-catting the US Federal Reserve they also expressed their intention to target a 1% inflation for the period. This comes after disappointing GDP news which revealed that the Japanese economy contracted by 2.3% on an annualised basis, on expectations of a 1.8% shrinkage.

Bernanke expands ZIRP till mid 2014

During the yesterday's Federal Open Market Committee meeting, FED's chairman Ben Bernanke adjusted downwards the US growth outlook and extended the Zero Interest Rate Policy until mid 2014. He didn't mention any further large scale asset purchases except  "Operation Twist" and rolling over of the current portfolio and he didn't mention any unemployment targeting (a widely expected figure).

Bank of America breaks the 5$ Maginot line

There was a wide debate going on whether the Bank of America stock price will drop below the 5$ psychological support level. It was deemed as protected by a vast amount of bids and though as the point of no return signalling a market correction. Now it happened folks: BA dropped to 4.95 and it is currently holding that level, which means we are in store for a correction in the US equities, a correction most probably caused and led by the financial sector. This could actually be the market sell-off that Bernanke is waiting for to allow him to announce QE3 in January.

China opened the flood doors by cutting reserve requirements

When the world screams for liquidity (shown by the increasing inter-banking swap rates), China comes to the rescue by lowering the reserve requirements and therefore unleashing a new wave of cheap money into the system. The markets responded very quick to this Chinese monetary stimulus, with equity and commodities spiking up, in a risk-on trade. Furthermore, in a following move, most of the leading Central Banks are now receiving USD swaps by 50 basis points less. Result: cheaper money.

One more sell-off before QE 3

Today was one of those days that raise my blood pressure to extreme levels. The risk instrument markets sold off, with the S&P 500 going down 1.55% to $1216 and with Gold crashing 3.14% to what is now $1716. Long term chart damage has been done in both of the instruments and it can be taken as a sign of trouble to come: the utter failure of the US budget committee or the failure to bail-out the insolvent Italy. At this point FED is waiting for a major sell-off in equities before announcing another QE programme.

FED's Chairman Bernanke sees trouble ahead

It's time to sober up and say a little prayer for the wellbeing of the United States of America. The recent Federal Open Market Committee decided today to keep the benchmark interest rate at the 0% - 0.25% interval, effectively prolonging the Zero Interest Rate Policy, through at least mid- 2013. FED's policy makers agreed that the economy picked up some steam while "signficant downsize risk" still remains. The US Federal Reserve will still conduct the so called "Operation Twist" which aims to swap short term Treasuries with longer term maturities in order to flatten the yield curve and lower the costs of capital investments. 

The inflation rate, measured by the CPI rose to 2.9% in September, the highest since 2008, while the core-CPI (excluding housing and energy costs) rose to 1.6%.

Next week's FOREX trading outlook

This week has been a hectic trading week, with most of the FOREX currency pairs behaving like in a bee hive. The global turmoil was enhanced by the two major news: first is the agreed haircut of 50% of the Greek debt and the subsequent leverage of the EFSF and the second one is the systematic dump of US Treasuries by the foreign investors (the latest to join the party is the Norwegian sovereign wealth fund which dumped all US Treasuries and all US mortgage backed securities). What is in store for us next week?

Greek gentlemen, we have a deal ! Or do we ?

Talks on the third wave of financial aid for Greece have come to an end (finally), during last night's second crisis summit held in Brussels. The conclusion? Greek bondholders will accept a 50% haircut on Greek debt, while the EU will provide guarantees and collateral through the EFSF and will work on the recapitalization of European Banks. The "hot potato" question still remains? Who is going to provide the money for all this? The US, the IMF, China ?

Yen reaches pre-WWII levels as FED hints at more easing

Interesting development on the FOREX market today was the unparalleled volume in the USD/JPY. The Japanese currency appreciated 0.9% to Y76.14 after it reached its all-time low of Y75.82. If you want to pick up this trade, tread carefully, as an intervention from from Bank of Japan is imminent on further signs of weakness. The Bank of Japan is trying to maintain the JPY at low levels to keep Japanese exports attractive, but doing so it hurts the Japanese savers who see their wealth generating lower and lower real returns.

How is inflation created and what can be done about it ?

The debate on the real cause of inflation, and whether its positive effects outweigh the negative ones  is growing steam, with the talks of more Quantitative Easing under way. Is QE3 going to generate more inflation or not? Is the view that QE and further market operations (POMOs) will fuel the increase in prices ?

To answer these questions, one has to start from the root of the problem. What is inflation and how should it be measured ?