The stock market sank on Wednesday after the Federal Reserve announced that it would cut another $10 billion from its monthly bond purchases.
The stock market had another “taper tantrum” on Wednesday, as investors reacted negatively to the decision announced at the 2:00 conclusion of the FOMC monetary policy meeting. The Federal Reserve will cut another $10 billion from its monthly bond-buying program – with another $5 billion reduction in monthly purchases of mortgage-backed securities, as well as another $5 billion reduction in its purchases of Treasury securities. The Fed’s liquidity pump has now been slowed to $65 billion per month in bond-buying, compared with $85 billion per month during 2013.
Although the cutback had been anticipated, there was growing anticipation that the Fed might have been intimidated from further tapering after the chaos experienced by the emerging markets last Friday. Emerging market economies have benefited from the quantitative easing program because the “easy money” made available by the Fed encouraged more risky investments.
The Dow Jones Industrial Average (DIA) lost 189 points to finish Wednesday’s trading session at 15,738 for a 1.19 percent decline. The S&P 500 (SPY) sank 1.02 percent to close at 1,774.
The Nasdaq 100 (QQQ) fell 1.08 percent to finish at 3,467. The Russell 2000 (IWM) sank 1.39 percent to end the day at 1,122.
In other major markets, oil (USO) advanced 0.12 percent to close at $34.73.
On London’s ICE Futures Europe Exchange, March futures for Brent crude oil advanced 25 cents (0.23 percent) to $107.11/bbl. (BNO).
April gold futures advanced $17.10 (1.37 percent) to $1,267.60 per ounce (GLD).
The transportation sector went off the rails on Wednesday, as the Dow Jones Transportation Average dropped 1.20 percent to 7,190, falling back below its 50-day moving average of 7,271 (IYT).
In Japan, the exchange rate for the yen continued to be the dominant factor in stock market activity. Japanese stocks soared as the yen weakened to 103.34 per dollar during the last hour of Wednesday’s trading session in Tokyo. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (FXY). Honda shares vaulted 3.04 percent on the Tokyo Stock Exchange. The Nikkei 225 Stock Average jumped 2.70 percent to 15,383 (EWJ).
In China, stocks advanced as investors remained hopeful that Thursday’s release of the final reading on the HSBC China Manufacturing PMI for January will rise above 50 after the flash reading hit a six-month low of 49.6. A reading above 50 indicates expansion and a reading below 50 indicates contraction. The Shanghai Composite Index advanced 0.56 percent to 2,049 (FXI). Hong Kong’s Hang Seng Index surged 0.82 percent to 22,141 (EWH).
In Europe, a batch of disappointing earnings reports from the retail, automotive, and banking sectors sent stocks falling on Wednesday. The Euro STOXX 50 Index fell 0.89 percent to 3,011 – dropping further below its 50-day moving average of 3,057. Its Relative Strength Index is 38.50 (FEZ).
Technical indicators revealed that the S&P 500 fell further below its 50-day moving average of 1,812 after sinking 1.02 percent to finish Wednesday’s trading session at 1,774. Its Relative Strength Index (RSI) fell from 39.59 to 34.76. The MACD is taking a steep dive below the signal line, which would suggest that the S&P could continue its decline during the immediate future.
On Wednesday, all sectors declined except for the materials sector, which advanced 0.41 percent.
Consumer Discretionary (XLY): -1.60%
Technology: (XLK): -0.78%
Industrials (XLI): -1.07%
Materials: (XLB): +0.41%
Energy (XLE): -0.56%
Financials: (XLF): -1.18%
Utilities (XLU): -0.05%
Health Care: (XLV): -0.91%
Consumer Staples (XLP): -1.75%
Bottom line: As expected, the stock market reacted negatively to the unanimous FOMC vote in favor of another $10 billion reduction to the Federal Reserve’s monthly bond purchases. The fact that the major stock indices declined by approximately one percent – rather than by a more significant amount – demonstrated the lack of surprise concerning this announcement.
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