Fed’s Operation Twist Sparks Global Equities Sell-Off

ForexNewsNow – Yesterday, Asian and European markets had to digest the fall-out from the Fed’s ‘Operation Twist’. The Fed ‘s action and its assessment on growth was obviously no help to restore market confidence. The paradigm “the Fed does something, the market is happy” has obviously run its course. Markets clearly doubt whether the Fed action will have any lasting impact on the real economy. The Fed is running out of options.

This view that the Fed is running out of tools combined with it’s negative assessment on the economy caused panic among the investment community. At the same time, European policymakers are still unable to put a comprehensive, coordinated strategy in place to address the spreading of their sovereign debt crisis. In this respect, there was a lot of market chatter on a study from European Central Bank’s former Chief Economist Jurgen Stark as he indicated that fiscal imbalances risk undermining stability, growth and employment as well as the sustainability of the European Monetary Union itself.

Last but not least, markets grew ever more concerned that the economic slowdown will also affect emerging markets including China. So, everything was in place for investors to flee all potential risks and look for shelter. Equities and commodities were captured in a negative spiral and even gold was no longer able to profit from the broader panic.

Today, the economic calendar is thin, especially in the US, while in the euro zone, the Italian retail sales and Belgian business confidence data are scheduled for release.

More attention will however go out to the annual IMF & World Bank meeting and G20 Meeting over the weekend in Paris. In a statement on Thursday, the G20 said it committed to take all necessary actions to preserve the stability of the banking systems and financial markets as required.

Obviously, the EMU is under pressure from other members to increase the flexibility and the firepower of the EFSF. In this respect, the option of leveraging the EFSF and/or use the balance sheet of the ECB is never far away. It is reasonable to expect that world leaders are working on some kind of coordinated action. The question is whether they will be able to find common ground that is politically acceptable for everyone involved.

With respect to the EMU debt crisis, markets will continue to keep an eye on the negations between Greece and the Troika, even if this is only a small part of the global problem.

Source: KBC Bank