Global markets tumble after Fed announces Operation Twist

Global markets tumbled after the Federal Reserve announced ‘Operation Twist’, a move designed to lower long term borrowing costs, as investors were left reeling from a sharply negative tone and guidance over the headwinds facing the US economic recovery.

In a widely expected move, the Fed announced it would sell $400bn of short term Treasury bonds and re-invest them into longer term debt in an effort to lower longer term borrowing costs.

Part of the problem with last night’s Fed decision is not necessarily the fact that ‘Operation Twist’ was announced, as the market had been aware that this was the likely decision for days, but more so the fact that the same three members who dissented against keeping interest rates fixed for two years last time around, dissented this time around. When you align that dissent with political pressure to be less active, it becomes hard to imagine that the Fed could announce the third phase of quantitative easing that investors want to see.

The negative tone struck by the Fed in terms of the serious headwinds and downside risks facing the US economy sent a bit of a ripple through the markets.

What’s more, the clear divide in ideology that exists in the Fed remains so, despite the sharp deterioration of the markets in the last month and that does not breed confidence.

The reaction to the move has been a sharply negative one thus far. After the announcement, the Dow Jones fell 2.3% to close on its lows, whilst Asian indices fell between 2% and 4.8% respectively and this locked in a very negative start for European indices as a result.

The FTSE 100, DAX and CAC all quickly floundered upon market opening, falling well over 3% with resource and insurance stocks suffering in particular, and closely followed by major banks.

Moreover, with the FTSE VIX, a gauge of fear in the market, rising 10%, and the US VIX rising 13% yesterday, clearly investor appetite for risk has taken a bit of a battering since the Fed decision.

The miners and oil firms are key drags on the FTSE 100, with both sectors losing 5.3% and 3.5% respectively as investors offload risky asset classes and draw close correlations to 3% drops in the prices of copper and crude oil. Kazakhmys and Rio Tinto are two of the worst performing stocks in London today, falling 7% as a result.

Insurance firms have also been hit hard by investors after the Fed decision last night with investors highlighting that with insurers purchasing longer term securities in efforts to balance long term obligations, the move by the fed to lower long term borrowing costs could pose a challenge to this model. Prudential shares fell 6.5% and traded close to a new one year low in the process.