Equity Markets and the Monetary Policies

Current Futures: Dow +20.00, S&P +4.00, NASDAQ +3.50  

European Trade: European markets opened slightly in the red, following on from the weak momentum seen in the Asian equity markets. Despite the two overnight markets trading in the red, U.S. futures are trading above the breakeven line, helped by the forthcoming interest rate decision.

Later today, the Fed is expected to trim the interest rate by 50 basis points, down to 0.50%. This is already an ultra-low rate, showing that traditional monetary policy has reached its limits. Despite the cut, the effective Fed Funds are already trading as low as 0.10%, so the effect over the real economy will be limited.

However, it is very likely the FOMC will expands its role into the financial system, deploying some unconventional weapons, such as buying mortgages and government debt from the secondary market, further driving down the yields on treasuries. If properly executed, such an action has the potential to fight the disinflation/deflationary period the U.S. economy is facing right now. A report later today is expected to show that the CPI read fell a record 1.2% from one-month earlier on lower energy prices.

The Fed is not the only central bank trying to keep the economy from contraction. Both the People’s Bank of China and the Bank of Japan are expected to cut this week. In addition, the BoJ may face further pressure from the Government, which may expect the bank to pursue again a policy similar to quantitative easing used a few years back.

In the overnight session, the Nikkei fell 96.60 points (1.12%) to 8,568.02. The Australian S&P/Asx slipped 35.20 points (0.98%) to 3,556.20. In Europe, the major indexes opened lower. The U.K. Ftse fell 16.05 points (0.38%) to 4,261.51, while the German Dax rose 18.40 points (0.40%) to 4,673.22.

Crude oil barely moved in the overnight session, despite the intra-day volatility seen one day earlier. Crude oil for January delivery fell $0.50 to $47.80.

Gold is extending the gains seen earlier. Bullion for immediate delivery gained $0.40 to $833.30.

Previous Asian trade: Asian shares opened the new trading session in the red, affected by a dismal outlook. However, the declines are relatively small and can be easily reversed by an end of the day rally, as has happened in the last two weeks. 

The slump in manufacturing side of the economy seems to continue. After the Tankan report yesterday, gauging the large Japanese manufacturers contracted the most on record, a similar read was seen today at New York’s manufacturing index. Furthermore, similar reads are expected from both Germany and the Euro-area in the overnight session, with the manufacturing sector contracting for more than half of year. Tonight, one of Japan’s largest manufacturers, Sony, had its price estimate cut in half by Credit Suisse. The company has already lost 60% from the beginning of the year.