After the weekend vote results confirmed that Greece would likely stay with the euro, Asian stocks tracked the previous action in the western markets from the Friday before with another 1% gain. By the time Europe and the U.S. opened though, the sentiment Monday shifted to cautious optimism. Both markets closed about flat. We’re already seeing the beginnings of the breathless anticipation of Wednesday afternoon. Stocks are once again perched at frothy levels. The VXO fear gauge plummeted more than 10% to close in the 18′s and well below the 20 watershed level. IBM again knocks at the door of $200 and Facebook has gained ground to the $32 range. The stage is set for a very strange week.
Tuesday, Asia closed down 0.5%, Europe dropped over 1.5%, but US rose 1% on Fed easing hope. VXO sank below 18. Anticipation of FOMC meeting results heightened.
Wednesday was the big announcement for the markets. The FOMC decided to extend its Maturity Extension Program by $267 billion to the end of the year. Here are some excerpts from the June 20th press conference:
…the step we took, the extension of the Maturity Extension Program, I think is a substantive step and it will provide some additional support. And yes, additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy.
We welcome help and support from any other part of the government, from other economic policy makers.
…I think we can lower interest rates more.
And, you know, as I said, and as the statement says, if we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate.
…we did take a substantive step today by extending the Maturity Extension Program to the end of the year. Again, I think that’s a meaningful additional step.
I guess I would add to that, though that, you know, each of these nonstandard programs does have various costs and risks associated with it with respect to market functioning, with respect to financial stability, with respect to the exit process, and so I don’t think they should be launched lightly.
They are very committed to addressing these problems because keeping the Eurozone together, keeping the Eurozone trading bloc together is very important to the economies of those countries, so we leave to them the leadership.
But we are prepared in case things get worse [in Europe] to protect the US economy and the US financial system.
In terms of balance sheet actions, we are unlikely to do more maturity extension for a while because we have taken that about as far as we can. So we would have to take other types of steps in order to add to the amount of stimulus in the economy.
The Federal Reserve isn’t going to be buying European sovereign debt…
It’s telling don’t you think that the second snippet above refers to the Federal Reserve as a “part of the government.” Certainly they act that way, but of course we know that the Federal Reserve is a privately owned institution that on an ever-increasing basis assumes powers belonging to the government or its citizens.
While Wednesday stocks showed little reaction to the news, by Thursday stocks nosedived—supposedly in response investor distress (tantrum) over the limited nature of FOMC action. Friday, stocks in Asia closed flat, Europe was down about 1%, while U.S. stocks recovered a little over 0.5% after Moody’s downgraded major U.S. banks.
For the week, U.S. stocks closed about where they started. The VXO fear gauge dropped dramatically from over 20 to under 18 while AAII sentiment held at mildly bearish. Precious metals declined 5%. Facebook ended the week above $33 per share as a clear indication of the frothy nature of this stock market. Trading volume was generally low with a move to moderate on Friday.