The Fed FOMC left interest rates at near historically low levels while deciding it was too early to pull out of is current stimulus plans. The Fed also said the economy was improving especially in the housing and financial markets. The FOMC also decided to slow down its debt buying plan by extending its program to purchase mortgage-backed securities into the first quarter of 2010.
U.S. equity markets reacted with a strong move to the upside but buying quickly dried up as overbought conditions prevailed. Some traders believe that the Fed’s extension of its asset-buyback program is a sign that the recovery is going to be lengthy and labored. Traders feel that equity prices may be overvalued and too far ahead of current economic conditions. The technical closing price reversal top could be an indication that the indices have formed a short-term top.
Treasury futures reversed earlier weakness to close higher for the session. News that the Fed was going to extend its program to purchase mortgage-backed securities into 2010 sent a message that downward pressure would be on interest rates for at least another two quarters.
The U.S. Dollar turned an early weak session into a gain by the close of the day. The Dollar was trading lower when the Fed announced it would keep pressure on interest rates. This news triggered a spike up in foreign currency markets, but by the end of the day, the Dollar recovered, reversing the day in most currencies. The strongest currency market was the December British Pound which was up most of the day following the release of the minutes from the last Bank of England open market committee meeting. The minutes were friendly because they did not discuss lowering rates for bank reserve accounts. A secondary lower top was formed in the December Japanese Yen which is an indication of lower prices to follow. Weaker energy prices and the sell-off in equities drove the December Canadian Dollar to fresh lows near the end of the day.
December Gold failed to hold on to early gains following the late session rally in the U.S. Dollar. The failure to take out earlier highs following a new low in the Dollar has created a bearish divergence which could trigger further downside pressure tomorrow.
Crude oil and gasoline inventories rose more than expected which helped trigger a sell-off in the energy complex throughout the day. Weakening equity indices, gold and the Euro helped put further pressure on these markets as it sent a signal that demand may be waning for higher risk assets. Actual physical demand for crude oil and gasoline were additional bearish factors which lead to today’s weakness.
