IG Markets Afternoon thoughts 22 September

Across Asia, regional markets are all lower this Thursday followed the heavy selling on Wall Street in response to the FOMC’s operation twist and their downbeat economic outlook. The Hang Seng is the worst performer, down 4.1% while the Nikkei 225, Shanghai Composite and Kospi are all down between 1.7% and 3.4%.

In Australia, the ASX 200 is currently 2.6% weaker at 3967, just off its earlier session lows of 3959. After the late US session sell off stemming from the Fed’s bleak outlook for the US economy, today was always going to be a tough one for the global market. Losses for the day are broad based with the heavyweight materials, energy and financial sectors all getting crushed between 2.6% and 4.2%.

We’re seeing a widespread unwinding of risk following the FOMC comments released overnight. Whilst the operation twist was largely expected, it was the negative outlook comments that really shook the market to the bone, with Fed chairman Ben Bernanke saying “recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated". "There are significant downside risks to the economic outlook, including strains in global financial markets."

Judging by the huge amounts of selling, it seems the market doesn’t believe operation twist is enough to kick start the spluttering economy. Ahead of last night’s meeting, there was a feeling of hope across markets that the Fed may do something from ‘leftfield’ in order to shock the economy. Well it didn’t and instead gave a very downbeat outlook which seems to have unsettled markets even further.

I think this was one of the last chances that Ben Bernanke had to really get on the front foot and ‘jolt’ the market with stimulus. He chose not to take it. I think this leaves the Federal Reserve in a very dangerous position as it could find itself being dictated to by the market. Should the market slump in the ensuing weeks, the Fed will be forced to reconvene and announce further measures. It appears the market has the Fed over a barrel now.

Ben Potter
Market Strategist
IG Markets

ENDS

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