My Diary 534 --- The Game is Changed

Trading Diary (March 19, 2009) --- The Game is Changed

Overnight, The FOMC meeting ended with a bang. After Fed unexpectedly announced $1.15trn QE, stocks, USTs, commodities and gold all rallied while Banana currency has its big day. In fact, S&P has now rallied 17.4% in the past 7-day. 10yr yield cratered almost 50bps on the news, the most since Jan 1962.

In my own view, the Fed’s surprising move will deduce some market worries – 1) what do they know that the market doesn’t? If we have been told by the forecasts of a much weaker economy, then why else would the FED move to such extraordinary measures?  2) Is this the last measure? What Fed can do now is more less a game of how much more to buy. One thing for sure is if Fed decide to buy more (now =25% GDP), the shock to the markets will be less; 3) what is the impact on USD? Now, American should start to think about how they pay for the Fed’s B/S expansion and the stimulus package and what the implication to USD is? Looking at DXY, the risk of a much bigger down turn in USD is set up and I fear that it will be part of US policy. 4) What is the inflation outlook? This worry seems years away but I will watch for it as the next big trade in the near term now is almost for sure – TIPS…I think the game is now changed as Fed is now sending the US back into a comparative advantage for future growth and the ball is put on other central banks…

To HK market, weaker dollar is always good news as it improves the competitiveness of HK exporters. So far, some corporate news wroth for highlights are – 1) Insurance: given CIIH lowering of the expected investment return, this should pressure China Life and Ping An to do the same. I think China Life is a SELL and a good funding/Hedging stock for HSCEI; 2) Stock to be watch today is China Mobile. It will announce after market and has been a big laggard of this rally….Guess today HK will up around 200ppts…..

Overseas Market Reviews

Global equity markets rose 0.9% with +2.2% in US, +0.3% in Japan, while EU slipped 0.6%. Elsewhere, Fed announcement triggered a plunge in UST yields with 2yr dropped 22bp to 0.81% and 10yr plunged 47bp to 2.53%. We should see a corresponding plunge in conforming mortgage rates in coming days. 1MWTI oil decreased $1 to $48.14/bbl. USD fell 3.5% to EUR1.347, a 3-month low and fell 2.5% to YEN96.2.

Overnight Fed QE Program

The FOMC announced a dramatic expansion of its QE agenda. The Fed will purchase up to $300bn in govt debt over the next 6 months. In addition, the Fed will effectively double its support to the housing market, committing to purchases of up to $1.25 trillion (prev $500bn) of agency MBS, and $200 bn (prev $100bn) of agency debt. These purchases would amount to almost 10% of outstanding marketable US Treasury securities (notes and TIPS) in the 2-10yr maturity and 25% of outstanding agency MBS.