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Yesterday marked an interesting chapter for the QE3 ‘taper tale’ as the Fed surprised markets by unexpectedly refraining from reducing its stimulus program. Consequently, it appears that as long as the Fed continues with its stimulus measures, Wall Street will continue to see big gains.
Reason for the 'No Taper'
The Fed refrained from tapering QE3 as it needs further evidence of improvement in economy. According to the Fed, the economy is expanding at a moderate pace. Also, unemployment rate remains high, and due to changes in energy prices, inflation has run below the Committee's longer-run objective (3 ETFs Winner from ‘NO TAPER’ Shocker).
The committee feels that the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.
Impact on Market and ETFs
Both the Dow Jones Industrial Average and S&P 500 Index inched up to all-time or multi-year highs. In fact, the Dow Jones Industrial Average and the S&P 500 peaked to close at fresh new highs thereby surpassing the previous records of 15,658 and 1,709, respectively. The Nasdaq increased 1% to close at a 13-year high of 3,783.
In fact, investors should note that SPDR S&P 500 ETF (SPY - ETF report), which tracks the movement of the S&P 500, recorded a volume surge on the news and it ended the day up over 1%.
The Fed announcement sparked sharp price reaction in the bond, currency, and precious metal markets too. U.S. stocks rallied to form new highs while bond yields and the dollar turned lower (4 ETFs to Watch Ahead of Key Fed Decision).
The dollar index DXY inched down 1.2% after the Fed maintained its $85 billion monthly asset-buying program. This marks its biggest one-day slide in more than two months.
Consequently, currency ETFs tracking the dollar also saw some of their biggest losses in months. PowerShares DB U.S. Dollar Index Bullish (UUP), measuring the dollar currency against a basket of major foreign currencies, plunged 1% to 21.65 (3 Currency ETFs Crushed in Emerging Market Rout).
Impact on Gold and Silver
Gold usually moves inversely to the dollar. With the fall in dollar, gold tends to move higher and the resulting no-taper announcement by the Fed led to the fall in dollar and rise in gold prices (Gold ETF Falls as Fed Tapering Possibility Rises).
Gold and silver prices soared in response to the Fed’s decision. Gold prices recorded its highest gain in five years, rising 4.19% to $1,366 an ounce in New York. Silver also increased 6.17% to $23.18 an ounce. In fact, ETFs tracking the precious metal space recorded solid gains.
SPDR Gold Shares (GLD), tracking a 10th of an ounce of bullion, increased 4% to $132.01/share.
Market Vectors Gold Miners ETF (GDX) experienced even higher gains at 9% increase. Fed’s target to lower interest rates and for higher inflation sets good prospects for gold prices. GDX is the most popular and liquid product in the space, focusing on large cap gold miners.
Volatility Index and related ETFs
Volatility levels are best represented by the CBOE Volatility Index or the VIX. This fear gauge tends to do well when markets are sliding or fear levels ride high. The Fed announcement obviously had a negative impact on volatility products. VIX declined 6.47% in yesterday trading session.
In fact, the two ETNs tracking the Index namely VelocityShares Daily Long VIX Short-Term ETN (VIIX) and iPath S&P 500 VIX Short-Term Futures ETN (VXX - ETF report) each dropped 3.7% after the Fed announcement.
This surprise decision from the Fed had a huge impact on markets and it was responsible for some volatility in key asset classes. There were many winners from this news, as bonds, stocks, and precious metals all soared.
However, investors did see a sharp reduction in volatility-linked products, as these floundered on the Fed’s announcement. This trend could continue until the next Fed meeting—assuming no shocks in earnings season—so make sure to keep an eye on some of the above products as the next round of taper talk inevitably gets under way again soon.
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