Fed Rate Decision Fuel Global Economic Concern, Stock Dive

Fed Rate Decision Fuel Global Economic Concern, Stock Dive

$DIA, $SPY, $QQQ, $VXX

The US Fed kept its policy interest rate unchanged, showing reluctance to end an era of record monetary stimulus in a time of market turmoil, rising international risks and slow inflation at home. Stocks erased an advance after Chairwoman Janet Yellen indicated that risks in the global economy overshadowed signs of strength in America while inflation remained stubbornly low.

The Standard & Poor’s 500 Index fell 0.3 percent to 1,990.19 at 4 p.m. in New York, reversing a gain of as much as 1.3 percent. Stocks most sensitive to interest rates had the largest moves, with utilities and real-estate companies advancing more than 0.9 percent while banks lost 2.4 percent.

The decision to stand pat on rates keeps a pillar of the Bull market in place, as record-low borrowing costs have helped propel stocks higher by nearly 200% in the past 6.5 years.

It amplifies uncertainty about the strength of the American economy at a time financial markets have been roiled by concern that a slowdown in China will spread. The S&P 500 had fallen 3.1% this year through Wednesday after 3 years of double-digit gains.

Inflation has remained below the objective of Fed policy makers due to a 51% dive in energy costs over the past 12 months and a rising USD.

Now that this is behind us, people are going to start focusing more on the problems that caused the correction in August, which is weakness in China and other emerging markets and a rough time on the earnings front.

The decision to keep rates near Zero was nota surprise given the weakness on US equity markets. In four tightenings since Y 1990, including the tapering of bond purchases announced in Y 2013, the S&P 500 had posted positive returns over the prior 3 and 6 month frames, and was within 3% of the gauge’s 52-week high, according to the data

By comparison, the benchmark index was down 4.8% over the last 3 months through yesterday and 6.4% below its high of 2,130.82 reached in May. The S&P 500 has alternated between gains and losses for the past 9 weeks, a run of indecision that’s happened only 3 times in 20 years, according to the data.

Thursday’s rate decision is being received in a market where the role of computers has grown drastically since the last time the Fed raised rates. With high-frequency firms accounting for about 50% of trading in the US., daily volume has 3X’d since the early 2000’s and now regularly tops 6-B/shares.

Market anxiety has been elevated on concern that higher US rates could rattle emerging markets and threaten global growth. Price swings on the S&P 500 have widened to 1.5% a day in the past month, compared with 0.6% this year through July.

The Chicago Board Options Volatility Index (VIX) (NYSEArca:VXX) endured its biggest weekly gain on record in August, and has closed above 20 for 18 straight sessions, the longest stretch since June 2012. The gauge rose less than 0.1% to 21.36 Thursday.

Stay tuned…

HeffX-LTN

Paul Ebeling

DIA, SPY, QQQ, VXX, stocks, volatility, fed, rates, markets, stocks, rates, trading, prices

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