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Stocks To Rise, Dollar, Treasury Yields To Fall As Fed Keeps QE

By Debbie Carlson Kitco News
Thursday September 19, 2013 1:46 PM

(Kitco News) - The Federal Reserve surprised markets Wednesday when they kept asset purchases at $85 billion a month, and that will support equities while pushing down the U.S. dollar.

The yield for the 10-year U.S. Treasury note and 30-year bond may also fall, market watchers said.

Market participants, from equity to commodity traders, braced for the Federal Open Market Committee to start reining in its massive stimulus program, with the general consensus being that the Fed would announce a “token” tapering of $5 billion to $10 billion a month.

Instead, the Fed said they would keep buying bonds, known as quantitative easing, saying that they would like to see more “evidence of growth” before it moves forward with tapering. Additionally, Chairman Ben Bernanke said it’s likely the Fed may not start to raise rates until 2015.

Stocks rallied on the news, with the e-mini Standard & Poor’s 500 stock index future pushing to 1,723.25, a record high. Prices continued their advance on Thursday. Other indexes, such as Dow Jones Industrial Index, also shot to new highs, while the Nasdaq 100 also rallied.

U.S. Treasury yields fell on the news with the 10-year yield having its biggest one-day drop in nearly two years. Before the Fed news, U.S. 10-year Treasury yields were near 3%, but as of mid-morning they are hovering around 2.738%. As yields fell, bond prices rose, which is what normally happens as yields and prices move inversely.

The U.S. dollar also broke its recent uptrend as the Fed said it would keep QE in place.

The reaction of the markets suggested that the Fed news took many by surprise, said Andrew Thrasher, chartered market technician at Financial Enhancement Group.

“A lot of institutions were positioned for a tapering and that was reflected in the type of reaction we had. Usually after a Fed meeting action is whipsaw, it will go up, then down, or vice versa. Here it just went up” in stocks, he said.

Rob Kurzatkowski, senior commodity analyst, optionsXpess, said stocks are likely to “ride the momentum” of the Fed’s announcement.

“The Dollar Tree and Microsoft stock buybacks have given investors a reason to remain in the stock market,” he said.

Thrasher said stocks are poised to rally further into the year’s end because the Fed is keeping QE, although in the near-term equities could see a pullback.

“Now that we’re at the highs, we might see some profit taking coming in. There is a bit of frothiness in the market. But now that we’ll still have QE, we’ll see further gains. Going into the fourth quarter we’ll also see hedge funds having to chase the market because they’ve underperformed…. I’m bullish into the year’s end with QE,” he said.

Looking at seasonality studies, Thrasher said equities are due for a pullback. “September gets a bad rap because it’s usually the weakest month of the year and that usually starts in the second half of the month. So that may also cause some profit taking here,” he said.

Thrasher put short-term technical chart support for S&Ps at 1,700, with secondary support at 1,625, near the August lows. “If we get to 1,625 we’ll have to revaluate, to see how small caps are doing and international stocks, before taking action,” he said.

Prior to the Fed’s announcement, stock market strategists were calling for a pullback in equities, noting signals like the nine-day Relative Strength Index had moved above 70%, which is considered “overbought” territory.

However, Kurzatkowski said given how strongly the market rallied on Wednesday, the further gains are possible. “The breakout occurred (in the e-mini S&P) with the RSI above the 70% mark, suggesting the breakout may be explosive. The market may run into a bit of resistance near 1,730, extension of the line from May and August highs, and 1,750,” he said.

The outlook for Treasury yields is lower now that the Fed is keeping QE, analysts said.

John Person, president of National Futures.com, said he sees the yield on the 30-year bond falling about 50 basis points from its current level of 3.78%, which is close to where the yields were in June before the market talk about tapering really kicked in.

“The best place to be is in equities as the Fed is trying to keep bonds artificially low,” he said.
Person noted that looking at the commitment of traders report for Treasury bond future from the Commodity Futures Trading Commission, the small speculators are heavily net short.  He said the last time small speculators were so heavily net short was at the end of 2008, when bond prices rallied sharply.

Barclays also lowered the outlook for 10-year notes, saying they now see 10-year Treasury yields ending this year at 2.85% because of the Fed’s dovish signals about the start and pace of policy normalization.

“While the Fed funds projections are likely simply a signaling mechanism, and the Fed may very well revise the pace if the outlook brightens, for now, we do not believe the rates market will question the path laid out by the Fed,” they said.

Taking a contrary view is Alan Bush, senior research analyst, ADM Investor Services, who said he’s not necessarily convinced that Treasury yields will stay down or that bond prices will continue to rise because of the continued QE.

“Treasurys have really underperformed the news. Despite QE, which is designed to keep rates down, the trend in rates has risen and bond prices have fallen,” Bush said.

He said he expects the yields for longer-term bonds such as the 10-year note and 30-year bond to rise and prices to fall. “I think we’ll see the price on the 30-year bond fall to 128.25,” he said. The price is currently at 131.10.

The U.S. dollar saw a sharp break on Wednesday after the Fed news and is now holding at a seven-month low.

Thrasher said the break in the U.S. dollar’s technical charts was harsh, noting that it broke an uptrend drawn from 2011 lows to the January lows and also pushed beyond the lows from May and August. Whether the dollar has changed its trend remains to be seen.

“When we have a break like that, I like to see confirmation. So we’ll see how the market trades by the end of the week and next week to see if the view changes from bullish to neutral,” he said.

Bush said the dollar rose on the idea that interest rates were going to rise further because QE was going to be reduced. “The dollar is just going to parallel Fed policy,” he said.

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By Debbie Carlson of Kitco News; dcarlson@kitco.com,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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