Existing home sales in the US will also attract attention

Market movers today

• The Fed surprised the markets yesterday as it did not reduce the monthly bond buying – basically, the recent tightening of financial conditions will be not allowed to continue given the risk to the recovery. Hence, rates and volatility are expected to decline going forward. As seen yesterday, this is very positive for the stock market.

• Initial jobless claims in the US are expected to provide more information about the underlying trend as last month’s decline was due to technical factors.

• Existing home sales in the US will also attract attention, as housing market indicators such as mortgage applications suggest the recent increase in mortgage rates is taking its toll on housing activity.

• The Swiss National Bank (SNB) will announce the result of its Q3 monetary policy meeting. With no inflation and a still strong franc we expect the SNB to keep its policy unchanged and hence to maintain the 1.20 minimum target on EUR/CHF. While money growth has accelerated and the economic outlook in general has improved, we doubt that the SNB will begin to discuss monetary policy exit already at today's meeting.

• Norges Bank meeting is at the top of the agenda for the Scandies. See page 2.

Selected market news

The Federal Reserve surprised the markets as it unexpectedly refrained from reducing the USD85bn pace of monthly bond buying. The Federal Reserve said that it needs to see more signs of lasting improvement in the economy. It is worried about the labour market as Chairman Bernanke stated that ‘conditions in the job market today are still far from what all of us would like to see’. Furthermore, it is worried about the recent rise in interest rates as ‘the committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth’.

This is a clear signal that the Federal Reserve will avoid tightening monetary policy too quickly. This is underpinned by Fed Vice Chairman Yellen being seen as the frontrunner for the Fed Chairmanship, and she is expected to continue the current monetary policy.

Both the US bond and stock markets responded very positively to the news from the Federal Reserve. The US Treasury yield curve flattened significantly between 2Y and 10Y as 10Y rates declined by 16bp and 2Y rates by 5bp.

Another winner in this environment should be EU peripheral bond markets as lower rates are supportive for the growth outlook also in Euroland, so look for a solid rally in both semi-core and peripheral bonds in especially the 5Y segment. The ‘loser’ in this environment is USD that has weakened against both JPY and EUR. Asian stock markets rise while bond yields and credit risk decline. Currencies such as the Indian Rupee and Thai Baht gain. The Fed is not only sending a signal to the US but also to emerging markets that it will not risk to derail the recovery and liquidity is going to be abundant going forward.