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Local Markets Feel Effects of FOMC Minutes

11.59 AEDT, Thursday 21 February 2013

Local Markets Feel Effects of FOMC Minutes

By Ben Taylor (Sales Trader, CMC Markets)

The Australian equities market is feeling the effects of the FOMC minutes, which showed the different views of members on the continuation of the $85 billion a month bond buying program.

The materials and energy sectors are the noticeable underperformers as a stronger US dollar weighed on commodity prices.

The FOMC minutes started on a positive note stating that the economy remained on a moderate growth path and that economic outlook stayed modestly improved relative to the December meeting. It also mentions a reduction in downside risks facing the economy and the partial resolution of the fiscal cliff. The minutes also state that the bond buying program has been effective in helping to stimulate the economy.

The minutes also discussed the costs of the program. Inflation, undermining financial stability, and risks of the Fed Reserves to capital losses were among the most notable. Once the benefits and the costs were weighed against each other, differing views on how to continue this program emerged. Several wanted to vary the asset purchases while some discussed instances of removing stimulus prematurely. In summary, the market saw uncertainty and when uncertainty increases, so does risk. This increased risk was the main reason why the US and Australian equities markets were sold off.

The possibility that the Fed’s bond buying program would be altered in the near future caused the US dollar to strengthen as inflationary pressures may lessen. This provided downward pressures to US dollar denominated commodity instruments.

The US Flash Manufacturing PMI, Existing Home Sales, and the Philly Fed Manufacturing Index are scheduled to be released tonight. It will be interesting to see how the market reacts to these figures after the release of the FOMC minutes.

ENDS

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