Thursday, March 19, 2009

Market Reflections

The government is printing money like crazy, raising questions over inflation but also improving the outlook for borrowing and with it the outlook for the economy. The Fed, in an effort to free up cash in the banking system, greatly intensified its quantitative easing program, saying it will purchase up to $300 billion in long-term Treasuries and an additional $750 billion in agency securities. The Fed is also expanding collateral for business lending.

The surprise news pulled money deep into Treasuries, which now have a guaranteed buyer, and pushed money out of the dollar where lower Treasury yields spell a cross-border disadvantage for U.S. investments. Details are still being released but the Treasury buying will be concentrated in the 2- to 10-year sector. The yield on the 2-year note fell nearly 25 basis points to 0.79 percent with the yield on the 10-year, ending at 2.52 percent, down nearly 50 basis points on the day!

But it was the decline of the dollar that was the most dramatic event of the day, falling 4-1/2 cents to $1.3450 against the euro. The decline tripped a major run into commodities where gold, which had appeared weak earlier in the day, jolted $50 from lows to $940.90 in late electronic trading. Traders said concern over inflation is major a positive for gold though guaranteed demand in the Treasury market may, at the expense of gold, increase the attractiveness of Treasuries as a safe haven.

Stocks bolted higher on the announcement but gains eased with the S&P 500 ending 2.1 percent higher at 794.35. Oil also jolted higher, ending at $49.19 after trading below $47 following new builds in weekly inventory data.

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