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Everybody loves Ben’s $600 billion–at least in the short term

posted on November 4, 2010 at 2:30 pm
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The reviews are in: Global financial markets love the Federal Reserve’s $600 billion program to buy U.S. Treasuries. And why not? In the short term, the logic goes, the Fed has pledged to support global asset prices with $600 billion in U.S. dollars.

So overnight in Asia after the Federal Reserve’s announcement in the afternoon (New York time) of November 3 stocks climbed. The MSCI Asia Pacific index rose 1.7% to its highest level since July 24, 2008. The Shanghai Composite Index rose 19%. In Hong Kong the Hang Seng index was up 1.6%. Japan’s Nikkei 225 index gained 2.2%.

Europe’s markets, in their turn, were just as glowing in their reviews. The Stoxx Europe 600 Index was up 1.5% as of 1 p.m. in London. That’s the highest level on the index since April 26. The FTSE 100 gained 1.9%, the CAC 40 in France was up 1.9%, and Germany’s DAX climbed 1.6%.

All this even though the Bank of England decided not to follow the Fed’s lead. That central bank said today that it would not increase its bond-buying above the 200-billion-pound already announced.

Whether global financial markets will be quite so enthused about the long-term effects of the Fed’s $600 billion buying spree is open to question. Central bankers in Asia, who have a somewhat longer-run view than the traders who drove up stock prices today, for example, were extremely critical of the Fed’s move. A $600 billion program of quantitative easing would weaken the U.S. dollar, drive up the value of currencies throughout the region, and let loose a flood of cash into developing economies and markets that will push up asset prices for everything from stocks to real estate.

An advisor to the People’s Bank called quantitative easing “uncontrolled “ printing of money. Japan’s prime minister accused the U.S. of pursuing a weak-dollar trade policy. In Hong Kong monetary officials warned that real estate prices could surge.

I’d expect another round of such tightening measures as interest rate increases and additional controls on capital flows during the next few weeks in reaction to the Fed’s move.

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  • bag on 4 November 2010

    If the Fed is buying more bonds, won’t that increase the price and thus lower the yields? I am confused as to why interest rates are going to increase due to the Feds actions.

  • wsm on 4 November 2010

    @ bag:

    The ‘tightening measures’ that Mr. Jubak is alleging relate to the anticipated response of FOREIGN central banks, not the Fed.

  • nocnurzfred on 4 November 2010

    Screw this buying of Fed bonds & Bank Bailouts. Send all of last years taxpayers a 10% non taxable refund. No new govt employees, as IRS has all the info. Place a $10K cap on all refund checks. If you paid $15000, you get $1500. If you paid $200,000, you get the $10K cap. If you paid zero, you get zero. Taxpayers know how to make stimulus money work!

  • 6waysfrom on 5 November 2010

    Please note that the Hong Kong dollar is pegged to the US dollar which now makes it the cheapest regional Asian currency.

    In spite of a possible rise in property taxes, I think this is better than gold – .

  • yx on 5 November 2010

    Key word: ” short term”. Who knows how long the QE2 effect will last.

    Off topic.
    One more reason why I got out all US banks.

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