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Fed brakes, oil gushes, investors cheer

In its monthly statement the US Federal Reserve announced the start of its stimulus withdrawal program in October and surprised markets with projections of another rate hike this year. The USD rose and bonds sold off in response. After a quiet European session, spooked investors initially sold stocks but regained confidence to push major indices to another all-time high.

In a well flagged move the Fed will start running down its balance sheet next month. The October withdrawal is $10 billion, paltry compared to the almost $4 trillion of Fed funds sloshing around the global monetary system. However the accompanying projections showed 11 of 16 board members expect US rates to be 0.25% higher by year end and one forecast rates 0.5% higher. This prompted a currency surge and a lift in 10 year bond rates to 2.27%. The implied confidence in the economy saw a lift in risk appetites and gold was a notable casualty.

An immediate 0.5% drop in the S&P 500 reversed quickly as focus shifted from the implied rate rise to Fed confidence in the temporary impacts of hurricanes and the underlying strength of the economy. Base metals found support and oil jumped on inventory data that included a huge 5.7 million barrel draw on distillate supplies. The strength in growth assets pushed Asia Pacific futures into positive territory.

Australian investors face a complicated trading day. Despite a stronger USD the AUD is higher on the back of stronger commodity prices. The positive impulse in shares could be negated by the expiry of the September futures contract. Much larger than normal trading volumes are expected and potential strength in energy stocks counters recent general underperformance by the Australia 200 index. It’s a coin toss.

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