The Fed announced the end of QE yesterday, and though this was both well-signaled by the central bank and widely-expected by the market, the stock market still sold off following the release of the FOMC statement.
By Peter Martin
Friday, October 31, 2014
Thursday has seen a rebound in stock indices though, with investors finding encouragement in data from the Commerce Department that shows the US economy grew at a faster-than-expected pace in the third quarter.
The first estimate of third-quarter change in GDP came in at a vigorous 3.5% (annualized). Though the pace of growth was less steep than the 4.6% seen in the second quarter, that bumper number owed a lot to a reaction to the weather-hampered first quarter and the Q3 growth was substantially better than the consensus estimate, which had called for 3.0%.
By mid-afternoon in New York, the Dow Jones had risen by 0.92% or 156 points to 17,130, while the broader S&P 500 index gained 0.51% or 10.2 points to 1992.5.
The Dow Jones was given a particular lift by a surge in Visa ($V) following strong results from the payments services company. Visa, the most heavily-weighted component of the Dow Jones, has rallied more than 10% in today’s trading, taking its share price up to $236.50. The company reported better-than-expected earnings and revenue for its fiscal fourth quarter after the market closed last night. ‘Our enviable competitive position, strong business model, and great talent helped us deliver adjusted EPS growth of 17% for the fourth quarter and 19% for the full year in the face of continued tepid economic growth and a strengthening dollar,’ said CEO Charlie Scharf. ‘More importantly, the underlying metrics which will drive our revenue growth over the longer term are strong and getting stronger.’ The company also announced a $5 billion share buyback.
Fed stance drags on commodity prices
In the commodity market, Wednesday’s developments were still having an impact on prices, as traders digested the Fed’s statement and data from the Energy Department showing domestic oil production at a 28-year high.
The Fed’s statement has been interpreted as indicating a more hawkish stance for several reasons: it failed to recognize recent economic weakness in Europe; further QE was not mentioned as a future possibility; the description of the labor market was bullish, saying that recent data ‘suggests that underutilization of labor resources is gradually diminishing’; and the risk of too-low inflation was downplayed, with the FOMC assessing that ‘the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.’
This has had a double-whammy for commodity prices. First, the removal of stimulus without the suggestion of a possibility of future QE tends to act as a headwind for assets like commodities that are correlated to risk demand. Second, the more hawkish tone has boosted the dollar. With many commodity futures priced in US dollars, this makes them less attractive to foreign investment.
By mid-afternoon in New York, US light crude oil futures were down by 0.74% at $81.63 a barrel. The EIA reported yesterday that US crude production grew 0.4% in the previous week, with output now at its highest level since 1986. US crude oil inventories swelled by 2.06 million barrels last week.
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