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Indices broadly weaker as traders eye FOMC decision BoE minutes indicate QE2 closer

Article By: ,  Financial Analyst
September 21, 2011 12:28 PM

European indices traded broadly weaker on Wednesday after yesterday’s strong advance, as traders diversified their risk somewhat ahead of tonight’s all important FOMC decision, where traders are expecting an announcement of ‘Operation Twist’.

BoE nears announcing more QE
Minutes from the latest MPC meeting at the Bank of England showed no change in voting for either rates or QE but did indicate that members were moving closer to announcing a second phase of quantitative easing to help support the UK economy. The minutes shows that whilst eight members of the committee voted to keep QE at £200 billion, they also thought it was increasingly likely that more QE would be needed.

The BoE has always erred on the cautious side rather than react instantly to developments but the minutes from the last meeting shows that they are slowly becoming convinced that more QE is necessary and have their finger on the trigger should the situation deteriorate. The FTSE fell 35 points or 0.6% by 9.20am, whilst deeper falls were seen for the DAX and CAC, which fell around 1%.

The key drags on the UK index were commodity related stock sectors, where we have seen some early profit taking from investors after these sectors rallied well in yesterday’s 2% index gains. The oil and mining sectors both lost 1%, as traders tracked weaker crude oil prices and downsized risk ahead of tonight’s FOMC.

All eyes on FOMC
All investors are looking ahead to tonight’s FOMC meeting, which has taken on greater significance since Ben Bernanke delayed announcing any measures to help curtail the struggling US economy and fragile market sentiment at Jackson Hole last month.

Investors are used to seeing Bernanke in tune with sentiment and so whilst expectations are for an Operation Twist type announcement, whereby short term securities are sold and reinvested into longer term securities, we cannot discount a surprise in QE3 either. That said, the fragmentation within the FOMC itself, where dissenters were seen last time around, needs to be realigned for this to happen.

As the FOMC decision comes after European stock markets close, there may be limited upside to today’s markets whilst investors may also use the session to position themselves for what may come after the close.

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