Dollar Rebounds As Fed Plosser Sent Equities Lower

U.S. equities staged a sharp fall toward the end of yesterday after Philly Fed President Plosser poured cold water on the impact of Fed's QE3. The Dow closed the day -101 pts. lower while S&P 500 also dropped -15.3 pts. Asia stocks followed with Nikkei down -171 pts, HK HSI down -184 pts at the time of writing. Commodities were relatively steady thought with the CRB index holding above 305 level and crude oil is still defending 90 psychological level. Dollar extended recent rebound but the dollar index is still kept well below 80. European majors and commodity currencies weakened against both dollar and yen.

Although the market has been excited after the Fed announced QE3 in the September FOMC meeting, not everyone believes that the new measures are effective. Philly Fed President Plosser stated his strong opposition and said that "increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment." And he warned that "by greatly expanding the size of the Fed's balance sheet, the new asset-purchase program will exacerbate the challenges that the Fed will face when it comes time to exit." Plosser said that additional asset purchases are "unlikely to reduce long-term interest rates by a significant amount" and "we are unlikely to see much benefit to growth or to employment from further asset purchases". Plosser also said that "conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility". Plosser expects US economy to grow at 2.0% in 2012, and around 3% in both 2013 and 2014.

In the Euro zone, ECB President Draghi reiterated the necessity of the outright monetary transactions (OMT) program. Draghi stated that the central bank had "moved to ensure price stability by removing unfounded fears about the continuance of the Euro zone…There is no doubt that these measures are supporting financial market sentiment". Yet, Draghi also stressed that "without reforms and conditionality, the interventions would not be effective and would not be credible". EU Economic and Monetary Affairs Commissioner Rehn urged markets to remove all doubts as to Euro's sustainability. Rehn emphasized that EU is "here to stay" even though the “macroeconomic outlook is still bleak.” He also emphasized that ECB's OMT will “available only to countries that pursue sound budgetary policies and address macroeconomic imbalances.”

The market has widely anticipated that Spain would be the next country to seek funding from the EU/ECB/IMF, although the government has still refused to make formal request so far. Spain will announce it new budget plan this week. Yet, the debt ridden country was reported to have violent protests against austerity measures, signaling the government would face a lot of challenges ahead in implementing fiscal consolidation. Spain's Deputy prime minister Soraya Saenz de Stantamaria said "to take decisions you need to have all the elements on the table", and she emphasized the need to know "what extent the ECB will intervene in the secondary market".

On the data front, New Zealand trade deficit came in wider than expected at NZD -789m in August. UK CBI reported sales, German CPI and US new home sales will be featured later today.