Hopes of Fed Stimulus Mildly Boosts Risk Appetite

June 6, 2012 01:40 AM

What Traders are Talking About:

* More Fed help on the way? An article in the Wall Street Journal says that due to recent weakening U.S. economic data and increasing financial strains in Europe, the Fed may be more willing to act with stimulus sooner rather than later. Action at the upcoming June 19-20 Federal Open Market Committee meeting may be too soon, but discussions of more stimulus for the economy are likely picking up steam. The article suggests the Fed may choose to expand its "Operation Twist" program, which is set to expire at the end of June or come with a fresh round of quantitative easing (QE3).

The long and short of it: Global markets were boosted by talk of potential Fed action, almost as if investors have been waiting on such talk to give them confidence to take on more risk in the face of rising global economic concerns. If that's the case, the Fed is truly the proverbial "security blanket."

* ECB keeps interest rates unchanged. As expected, the European Central Bank (ECB) kept its benchmark interest rates steady at 1% despite worsening economic conditions. The ECB also left its deposit rate and marginal lending rate unchanged at 0.25% and 1.75%, respectively.

The long and short of it: With the ECB standing pat on interest rates for now, focus is on President Mario Draghi's press conference later this morning to see if he gives hints at when the ECB may cut interest rates. Many believe (hope) it could be as early as next month.

* Moody's downgrades some German, Austrian banks. Moody's Investors Service cut the credit rating by one notch on six German banking groups and Austria's three largest lenders Tuesday, saying there is risk of further shocks from the euro-zone crisis and these institutions have limited ability to absorb the shocks. The news was met fairly well within the investment world, however, as the cuts were less than for other banks throughout the euro-zone, suggesting the situation in these two countries is more stable than in other areas.

The long and short of it: In terms of negative news, this batch is on the mild side, and therefore, had limited negative market reaction.


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