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Wall Street was certainly disappointed by the latest Fed decision on interest rates. Not only didn’t the Fed cut its key discount rate by 50bps as many market participants had hoped for, it failed to show the urgency of the credit market tightness in its statement. Basically it means the Fed is going to wait for worse financial and economic condition before making the next cut. All interest rate sensitive sectors were sold off sharply following the news. Although I don’t think they are going to re-test the November lows in the short term, they are also going to have difficulty moving much higher from here. Not surprisingly, the treasury bonds rallied sharply while the spreads between risky bonds and risk free ones were increasing. The US dollar also rallied against most major currencies except for the Yen, which got strengthened as investors avoided risky assets by unwinding yen carry trades. Since we are very close to year end, trading activities may not follow the usual pattern due to year-end window dressing. |
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