The US Federal Reserve launched its $400bn ‘Operation Twist’ as expected, selling short term bonds (under three years) and using the cash raised to buy long-dated treasuries.
Long term interest rates fell as expected (the yield on the 30 year Treasury bond fell from 3.22 to 3 percent) as the maturity of the government’s balance sheet increased. The S&P 500 index fell 2.9%, recognising the inherent implications of weakness in the economy — why these had not already been factored-in by the market which knew what was coming is not clear.
Brazil’s finance minister reportedly criticised the move, saying the Federal Reserve was trying to use monetary policy to stimulate demand — a job for looser fiscal policy and lower taxes. (The US Government funding crisis makes tax cuts near-impossible.)
The Bank of England signalled it was ready to print more money, through further Quantitative Easing in November, if the situation had not improved by then.
European financial markets suffered further losses.
And by early trading today the Asia Pacific markets had slumped 3.7%, the FTSE Eurofirst fell 2.6% and Wall Street was expected to fall another 1.1%, on top of its 2.9 ‘plunge’ yesterday. Commodities such as copper fell. The market’s appetite for risk was seen to be low, as rather than taking ‘Operation Twist’ as an opportunity for growth (using cheaper 30-year money) the move is instead seen as an opportunity to improve short term returns by buying government T-bills, and selling everything else. $400bn worth.
New figures show activity in China’s factories is ‘slowing’.
Good news in Europe though: officials look set to speed up the recapitalisation of the sixteen banks that failed stress tests last year. It is not clear whether the recapitalisation funds will come from other national banks and government, or whether the EU’s ‘financial stability fund’ will be used. Coincidentally the fund is about the same size as the US Operation Twist — €440bn.