THE DISTILLERY: Fed magic

The Fed came and met and may have worked enough magic, with what little it has left in its weapons locker, to steady nervy markets. The US central bank changed the wording of its key statement and instead of saying interest rates would remain at current levels for an "extended period", now says it will keep rates "exceptionally low" until at least mid-2013. That brought three votes against the move, but a bounce on Wall Street. Oil fell, and gold, which had finished at a record $US1743 an ounce, bounced to $US1765 on the news that cheap money would still be around for two more years, or more. The US dollar fell against most currencies and shares had a decent recovery after early weakness, with the Dow up 430 points or more in the closing minutes, meaning a solid continuation here of yesterday afternoon's recovery, not that mad selling of the morning. 
 
The Financial Times explained the meaning of the Fed statement in its Asian edition this morning: "The US Federal Reserve attempted to tackle a rapidly weakening economy on Tuesday by freezing short-term interest rates for two years and opening the door to more quantitative easing, in a move that sent the dollar and Treasury yields sharply lower. The rate-setting Federal open market committee said: "The committee currently anticipates that economic conditions – including low rates of resource utilisation and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” The Fed added that it would "continue to assess the economic outlook” and was prepared to employ its policy tools "as appropriate” – a clear hint that it would consider further action." Yippee, we are saved, forget the downgrading, break out the happy juice, cheap money is here to stay!
 
Fairfax's Eric Johnston looked at yesterday's slump and surge here: "The Australian sharemarket has pulled back from the brink to lead a dramatic turnaround as expectations swept global markets the US Federal Reserve was poised to step in and bring some life back to the ailing American economy. After a stomach-churning 5.5 per cent plunge, triggered by a panic session on Wall Street, Australian shares staged a record recovery midway through yesterday's session to close in the black. The 268-point rally in local stocks was simply ''extraordinary'', said Goldman Sachs institutional dealer Richard Coppleson."

And fellow Fairfaxian Michael West wrote this morning: "Yesterday's spectacular bounce in the Australian sharemarket, after the deepest losses on Wall Street in two years, is demonstration of the opportunities to be had trading in volatile markets as prices whipsaw violently about. Trading is not for the faint-hearted, though, or those who can't afford to lose. The volatility of the market, over time, exceeds the capacity of most investors to handle it. But it's worth keeping an eye to fundamentals, even when sentiment has taken over. It's undeniable that violent sharemarket falls are inevitably followed by sharp market rallies."
 
The Financial Review's Chanticleer columnist, under a headline of "Riding the rate cut express" had this to say: "You could call it the Bill Evans sharemarket rally. That's the one you have when everyone starts to believe that the Reserve Bank of Australia will cut rates." Yes, but will it?
 
While The Australian's Michael Stutchbury wrote this morning: "This time, the market panic will have to play itself out. Unlike in the wake of the Lehman Brothers collapse nearly three years ago, governments have little ammunition left in the policy locker. The problem is that governments have become the problem as they bicker both among and between themselves. Don't expect much from the G20's new vow to "foster stronger economic growth in a spirit of co-operation and confidence". So far, this sharemarket rout doesn't look as bad as the GFC, when the world's money markets froze and world trade collapsed. And our banks are less exposed. But the hit to world economic growth could still turn ugly and leave financial markets vulnerable to further panic." 
 
And News Ltd's Terry McCrann wrote: "A big factor in yesterday's remarkable afternoon turnaround in our market was the expectation – or maybe just hope – that the Fed would ride to the market's rescue as we slept. Would the Fed 'do something' – anything? Running all the way, would it choose this moment to launch QE3? Known to non-experts as printing the confetti, formerly known as the greenback. Indeed. Perhaps, it would more boost confidence, by emphatically announcing it would not embark on QE3. After all, it ended QE2, with precious little to show for it in the economy, and the market then promptly collapsed." Well, it did very little except change a few words, so what will our sooky local fund managers, brokers and investors do now?
 
Amid the madness on the markets, Fairfax's economics editor, Ross Gittins had a timely reminder: "At times like these, much of the media tends to cater to people who enjoy a good panic. The sky is falling and the proof is that billions have been wiped off the value of shares in just the past few days. Which makes me wonder how I've survived in the media for so many years. I hate panicking. So I'm always looking for contrary evidence. I just have hope there's a niche market of readers who prefer a sober assessment. A bane of my working life is the way people imagine the state of the sharemarket to be far more important than it is in the workings of the economy. Our response to big falls in the sharemarket is based more on superstition than logical analysis, and a lot of people who should know better are happy to pander to the public's incomprehension."
 
The Australian's John Durie wrote this morning: "The unprecedented volatility in the local sharemarket yesterday is fundamentally bad news, despite the positive finish, because it tells you the market is still being driven by emotion. Just whether yesterday marks the bottom remains to be seen, but the reasons for the dramatic 25 per cent fall in the S&P/ASX 200 index from its April highs to lunchtime yesterday still hold. But the bottom line for corporate Australia and Australian consumers is that we are set for a long, slow global recovery.
 
And former Reserve Bank board member, Warrwick McKibbin wrote in The Australian this morning: "A fiscal contraction or even sticking to a fiscal surplus target in 2013 when revenues fall would impart a larger negative shock into the economy. Better to allow fiscal stabilisers to adjust – that is, revenues to fall and expenditures to rise – to buffer the shock with a clear policy of debt stabilisation across future years as increased deficits are brought back into surplus but not by an arbitrary date." So higher deficits, falling slowly, for longer.
 
And with the Australian dollar back above $US1.03 and soaring after falling under parity with the greenback yesterday (and from the high $US1.1065 last week), the AFR said in an editorial this morning: "It is hard to believe it was only days ago that there were calls for special assistance to help those parts of the economy feeling the pain of the high Australian dollar."
 
Fairfax's Elizabeth Knight wrote the obvious: "Returning the budget to surplus at this time seems both unnecessary and increasingly difficult. In the first instance, if the economy slows and corporate earnings follow suit, the corporate tax take will come under enormous pressure. The Gillard government will need to cut even deeper to obtain that outcome. Already it is clear tax derived from big areas such as manufacturing and retail will fall. The government must already be factoring this in and Treasury must be on the cusp of revising down its growth forecasts."

And this forecast yesterday on Bloomberg missed the mark with the Fed: "Federal Reserve policy makers are likely to embark on a third round of large-scale asset purchases, moving "more decisively” to secure the US recovery, Harvard University economist Ken Rogoff says." The working of the final statement was changed significantly, but the most important change was on the timeframe for the current record low interest rates.

Michael West wrote on the Fairfax websites yesterday: "Today is the best buying opportunity in the share market in two years. We know that because shares are well and truly at their lowest point since mid-2009 and more than 20 per cent off their highs of April this year. While everyone else is selling, and the market is starting to look very cheap on the basis of forward earnings, it's worth examining the "buy case”. Firstly, it's undeniable that violent share market falls are inevitably followed by sharp market rallies." The rebound in late trading appeared after this appeared, but there was no link, just good timing.

And later yesterday, Fairfax's Malcolm Maiden seemingly wrote a reply to the West column, also on the Fairfax websites: "You are hearing market analysts and professional investors talking about taking ''risk off'' as the market plunges, but that is just jargon. What they mean is that they are selling, either physically or virtually, through derivatives, to reduce their exposure to what is happening. Risk on, conversely, is buying that increases exposure to the market. So is this a "risk on" or "risk off" moment for individual investors? The answer I think, is that its simultaneously too late and too early to answer those questions. Shares are a very good long-term bet at current prices. But on a short and medium-term horizon, buying shares now is a less than fully informed punt that the recession call is wrong."
 
And Adele Ferguson also wrote on the Fairfax websites during yesterday's market madness: "The swift decision by the Commonwealth Bank and Westpac to slash interest rates today is the strongest indication yet that investors are strategically abandoning equities in favour of fixed-interest securities. It is a case of investors realising that the global economy is entering a period of low growth as the economies of the US and Europe have no choice but to repay massive debt. There is nowhere to run or hide. The fact is, equities markets are adjusting for a suddenly lower growth outlook."
 
Business Spectator's Stephen Bartholomeusz wondered if RBA governor Glenn Stevens was a rate cutter at the moment: "About now, Glenn Stevens and his team of econocrats at the Reserve Bank would be developing rather severe headaches. All year they've wanted to raise official interest rates to choke off inflation that's running beyond the bank's target range but now they are confronted with imploding financial markets, a dollar in free-fall, wealth destruction on a massive scale and the probability of a deep and prolonged global recession."
 
But The Australian's John Durie wrote on the paper's website yesterday: "Global equity markets are now stuck in a bear market, challenging their political leaders to take the necessary action to restore lost confidence. Interest rate cuts and stimulus packages won't help in the US because there is no political will, money, or sense in making further rate cuts. The $A now trades near parity because, for whatever sense of pride we took from it trading at $US1.10, the world sees it as a risk currency and risky bets are off the table. This is a market crisis caused directly by political failure."
 
Meanwhile, the AFR wrote this morning: "Concerns over Chinese inflation, falling steel prices and a contract dispute have raised fears of a drop in iron ore prices that would hurt Australia's big miners".
 
The Australian's Tim Boreham picked up on Cocal Cola Amatil's result yesterday: "There's a gaping disconnect between the quality of the local results trickling out and the mayhem on the markets that is approaching brokers-off-the-balcony levels. But that's the reality for the time being, so get used to it. As a purveyor of that ubiquitous fizzy beverage, beer and canned fruit, Coca-Cola Amatil should be in the eye of the consumer storm but not for the first time it's deftly managed to paddle its way out of trouble. However it's not completely unscathed, in that the high Aussie dollar has proved the last straw for one of its three fruit processing plants in Shepparton at a cost of 150 jobs."