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Political Economy
Posted at 03:40 PM ET, 08/09/2011

Live blog: Fed decision prompts return of ‘flight to safety’

3:40 p.m.: Fed decision prompts return of ‘flight to safety’

Chances are you’ve heard the expression “flight to safety” a few times over the past few days. That’s the phrase market analysts use to describe investors digging into safe bets such as gold, currencies such as the Yen and the Swiss Franc and Treasury notes and bonds.

And that’s precisely what happened after the Fed announced its policymaking statement: Gold, which had sat around the $1,730 to $1,740 range for much of the day, spiked $30 per Troy ounce and traded as high as $1,775 after the Fed’s statement. It has since retreated to about $1,764, but that level still reflects a pretty sizeable 1.4 percent jump on the Fed’s decision.

The Yen and the Swiss Franc also advanced, with the Yen gaining 0.8 percent against the dollar to 77.1 Yen per dollar and the Swiss Franc advancing an astounding 5.3 percent to 0.715 Francs per dollar.

Treasury rates also had a very sharp reaction: After initially edging higher, yields slipped on two- , 10- and 30-year bonds. Yields on two-year notes fell .08 percentage points to 0.18 percent, the 10-year note yield fell 0.18 percentage points to 2.13 percent and the 30-year note yield fell 0.11 percentage points to 3.54 percent.

If you were to plot those percentage points together in a line and form what analysts call a “yield curve,” you’d see that yield curve flattening. That’s not a good sign for the economy, as analysts usually interpret a flattening yield curve as a sign that a recession is near.

Oil trading also indicated weaker economic expectations, sliding down another $3 per barrel in mid-afternoon futures trading to just over $78 per barrel.

A weaker economic reading on the economy is not an unreasonable way to interpret the Fed’s statement. The fed maintains an exceptionally low federal funds rate of 0 to 0.25 percent only during times of prolonged economic weakness. And by indicating in its policymaking statement that it would be likely to keep the federal funds rate in that range through mid-2013, the Fed was signaling that the economy was very likely to remain exceptionally weak for the next two years. In that context, a flight to safety is not surprising.

Meanwhile, stocks turned around the losses they suffered after the Fed’s announcement. The Dow is now up about 186 points, or 1.7 percent, the S&P is up about 29 points, or 2.6 percent, and the Nasdaq is up about 66 points, or 2.8 percent as markets head into the last 15 minutes of trading.

2:50 p.m. Markets turn negative

It’s official: markets are down for the day.

Shortly after the Fed’s policymaking announcement - which pledged to keep interest rates low through mid-2013 - stocks turned sharply lower. At one point, the Dow and the S&P were each down by more than 1 percent, after spending much of the day in positive territory.

The Dow is down 1.9 percent as of 2:50, the S&P is down about .4 percent and the Nasdaq is up a meager 0.14 percent.


Fed Chairman Ben Bernanke adds his voice to chorus of public officials who argue that raising debt ceiling is vital for the health of the U.S. economy. ( GETTY IMAGES)
2:20 p.m: Fed pledges to keep interest rates low through 2013

The Fed announced that it will keep it’s federal funds rate at “exceptionally low levels” — currently 0 to .25 percent — “at least through mid-2013.”

The date-certain announcement is a significant move for the Fed, which usually veils its action in more opaque terms by saying it will merely keep rates low for an “extended period.”

The date-certain warning of low interest rates caused gold to move higher to $1,748 per Troy ounce and pushed the Dow into negative territory for the day. Right after the policymaking was announced, the Dow plummeted and was down .34 percent for the day; the S&P was still up, but only barely, at .24 percent; the Nasdaq was up just over 1 percent.

2 p.m: Expecting the Fed’s policymaking decision

U.S. markets pared back some of their gains in early afternoon trading ahead of the Fed’s policymaking decision. The dow was up about 0.8 percent, down from 1.7 percent earlier this afternoon; the S&P was up 1.4 percent, down from 2.4 percent, and the Nasdaq was up 2.1 percent, down from about 3.1 percent.

The Fed will release a policymaking statement at about 2:15 that markets will analyze closely to see whether it gives any hints of additional stimulative policy actions, such as quantitative easing. That’s when the Fed pumps money into the banking system by buying back bonds. The Fed has already had two rounds of quantitative easing, nicknamed QE1 and QE2, and markets are looking to see whether the Fed might opt for QE3 in light of the deteriorating market confidence and economic outlook.

12:35 p.m: European markets pare back losses

With trading now done on the European continent, it’s time to check in to see how investors reacted the day after yesterday’s selloffs. The signs are encouraging.

Europe pared back some of yesterday’s losses, with the U.K.’s FTSE 100 index ending the day up nearly 1.9 percent and France’s CAC 40 up 1.63 percent. Germany’s DAX index ended the day down .1 percent, but was up as high as 2.2 percent earlier in the day.

Stock markets for two countries under fire from debt-weary investors — Greece and Italy — also moved higher, with the Athens Stock Exchange general index advancing .2 percent and Italy’s FTSE MIB index moving up .5 percent. Spain, however, continued to decline, retreating about .4 percent.

Worries about whether Greece’s debt troubles would spill over to Italy and Spain grew so big that on Sunday, the European Central bank and leaders of the G-7 nations pledged to markets that they would intervene to stabilize the situation. The ECB’s move to buy up Italy’s and Spain’s bonds drove their yields down, but stock markets across Europe continued to plummet. Today, at least in part, markets seem to have regained some confidence in Europe, and that could buoy U.S. markets.

In the U.S. we are still up as the market heads into the final hour of trading before the Federal Reserve’s much-anticipated policymaking decision: The Dow is up 1.72 percent for the day, still a few points below the 11,000 level it fell through yesterday. The S&P is up 27 points, or about 2.4 percent, while the Nasdaq is up 73 points, or about 3.1 percent.


File photo of bars of 250 gram fine gold assets. (ARND WIEGMANN/REUTERS)

12:05 p.m.: Oil, gold remain steady

There are two other signs of (relative) optimism on the commodity front today: Oil prices are staying down and, at least for the moment, gold prices seem to have stopped their skyward surge.

On the oil front, prices on future deliveries of West Texas Intermediate crude, a key U.S. oil benchmark, are trading at around $ 81 dollars a barrel, maintaining its floor after yesterday’s 6.4 percent drop.

That means oil hasn’t followed stocks’ upward rally today. If it remains near the $80 per barrel range, it would be trading roughly near the levels it was at in October 2010, before the much-talked about economic “soft patch” began.

The main thing keeping oil down? “The big concern for oil traders has to be the slowdown in global growth,” Addison Armstrong, director of market research at energy advisory firm Tradition Energy, said on CNBC.

OPEC, the cartel representing petroleum-exporting countries, seconded those sentiments today when it edged down its 2012 petroleum demand estimates in a report optimistically titled “dark clouds over the economy impacting market direction.”

On the gold front, the precious metal that has only been getting more precious in recent days was going for near $1,733 per Troy ounce in late Tuesday morning trading. That’s still up more than 4 percent from Friday’s close before the U.S. credit downgrade, but down nearly $50 from an intraday high of $1,780, according to Bloomberg data.

So, investors may finally be backing away a bit from gold, which could indicate increasing willingness to go back into riskier assets such as stocks.

Which is, perhaps, why stocks continued to advance their early morning gains: the Dow is up 1.75 percent for the day, putting it less than 1 point away from breaking the 11,000 level it fell through yesterday. The S&P is up 27 points, or about 2.4 percent, while the Nasdaq is up 74 points, or about 3.16 percent.

11:05 a.m.: Race between Apple and Exxon Mobil

There are two stocks that the market is watching very closely this morning — Apple (NASDAQ:AAPL) and Exxon Mobil (NYSE:XOM) — to see which one will become the top stock in the Standard & Poor’s 500 Index.

Ten years ago, Apple ranked 287 in the list of the top companies in the Standard & Poor’s 500 by its market value, according to an index analyst. After yesterday’s drop, it ranked number two, just behind Exxon Mobil and ahead of IBM and Microsoft, in third and fourth place respectively.

Both Exxon and Apple were up sharply today, and as of about 10:50 a.m., Apple’s total market value of $340.7 billion was less than $5 billion short of Exxon Mobil’s $345.4 billion.

If Apple does take the number one spot in the index, it would make quite a statement about the U.S. stock market. Exxon, formerly Standard Oil of New Jersey, the oil giant started by John D. Rockefeller, has been a mainstay of the U.S. economy for more than a century, delivering steady dividends through thick and thin. Apple has been around for just over 30 years but has delivered sky-rocketing growth thanks to its constant product innovation. With Apple on top, growth may be back in favor over the safety and predictability of big-cap dividend yielding-stocks.

For more on the debate between investing in the Apples and Exxon Mobils of the world, see our Sunday business special on what Wharton Professor Jeremy Siegel calls “the growth trap”of stock investing .

And a quick market check: Yes, we are still up. The Dow is now close to breaking back above the 11,000 level, up 1.55 percent, the S&P is up nearly 2 percent, at 1,141, and the Nasdaq is up 2.6 percent to 2, 419.

10:07 a.m.: Markets hold on to early gains


Traders crowd around a post on the floor of the New York Stock Exchange at the opening bell. (STAN HONDA - AFP/GETTY IMAGES)
An early positive sign: markets have actually held on to and furthered their early gains in the first half-hour of trading.

The Dow Jones Industrial Average is now up nearly 160 points, or about 1.5 percent; The Standard & Poor’s 500 is up about 25 points, or 2.2 percent, and the Nasdaq has popped nearly 60 points, or 2.5 percent.

Keep in mind that last week whenever we saw early gains there were typically gone a half-hour into the session. But today the market has finally managed to hang on to those gains, which raises the possibility that the market may finally see an up day.

Three other early positives:

• The VIX index, a benchmark of market volatility known by traders as the “fear index,” is down more than 10 percent this morning, meaning that Tuesday is on track to be a less volatile trading day. That could give some investors confidence to step back into the market and begin buying.

• Financial stocks, which sold off heavily Monday, are leading today’s bounce-back. Bank of America was up nearly 5 percent shortly after 10 a.m., J.P. Morgan Chase was up nearly 4 percent, and Citigroup is up more than 10 percent.

• Yields on the 10-year Treasury are inching higher in early trading: they began the day at 2.37 percent and were up to 2.38 percent shortly after 10 a..m Remember, a lower yield means investors are willing to accept a smaller return in exchange for the safety of holding government debt, so if yields move the other way that means investors may be stepping away from some of their safe haven bets and stepping more into riskier bets like stocks.

9:45 a.m.: Markets open higher

And we’re off – trading began today with the markets up sharply on open, as indicated by futures trades before the opening bell.

The Dow Jones Industrial Average began the day up about .7 percent; the Standard & Poor’s 500 Index was up a little over 1 percent on opening bell and the Nasdaq rebounded almost 1.9 percent on open.

Keep in mind that the markets would have to do a lot better than that to pare back even a portion of yesterday’s historic tumbles: the Dow lost 5.5 percent, the S&P lost 6.7 percent and the Nasdaq lost 6.9 percent Monday, for a total loss of about $1.2 trillion of stock market value.

And a quick check in on three other key market indicators as we start the day:

·Gold futures: $1,762.90 per Troy ounce;

·10-year Treasury yields: 2.37 percent;

·Oil futures: $81. 63 per barrel.

9:41 a.m.: Day-after market preview

The day after a major selloff like Monday’s worst plunge since 2008 is always poised to be interesting, but even more so today since nothing’s been good enough to quell the market’s fear over the past 10 days.

A debt deal was announced:and stocks rose for a few minutes and then sold off sharply. The monthly unemployment report came in better-than-expected on Friday: shares rose briefly and then sold off. The European Central Bank said Sunday it would buy the bonds of Italy and Spain: shares rose briefly in Europe and then cratered.

So as futures on the Dow Jones Industrial Average and the Standard & Poor’s point higher this morning - Dow futures were up about 1.1 percent and S&P up about 1.4 percent - the biggest thing to look for is whether the increases will finally stick or whether we’re poised to see the market point higher on open only to drop precipitously like it has several times in the past 10 days.

Some other things to keep an eye on today:

• Will financial stocks continue to fall today? The financial sector led Monday’s selloffs, with financial stocks in both the Dow and the S&P settling down about 10 percent. The question today will be whether they finally stabilize or plummet even further. If that happens, it could seriously undermine investor confidence by bringing back memories of 2008’s financial sector meltdown.

• Will bargain hunters finally come back? You’ve undoubtedly heard analysts say that the market’s been oversold and is presenting some great buying opportunities. The key question today will be whether any of these bargain hunters will muster the courage to go out and start buying, or whether they will wait for the apparent market panic to subside so as to avoid catching the proverbial “falling knife.”

• Will gold continue to rally? The precious metal has been on an absolute tear lately, setting all-time new nominal highs almost everyday. Just Monday it was news when gold futures settled above $1,720 per Troy ounce; as of this morning they were at $1,762. If the gold rush continues, expect to see gold break through it’s 1980 all-time record of $851 per Troy ounce when inflation is taken into account.

• Will the Fed quell the markets? The policymaking committee of the Federal Reserve is meeting today and will announce its latest policy decision shortly after 2 p.m. We will be watching closely to see how stocks perform after the policy announcement. Needless to say, if the shares continues their freefall, it will be a major statement about market confidence - or lack thereof.

By Cezary Podkul  |  03:40 PM ET, 08/09/2011

 
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