The Fed, Cyprus and China
As was widely expected, the Federal Reserve left interest rates untouched at near zero, and the FOMC announced it would continue its current bond-buying program of $85 billion per month. About the only real question on Wall Street was what the Fed would say about the economy in its statement aside from holding interest rates steady.
Here’s the money quote from the FOMC statement regarding the all-important labor market, “Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated.” The Fed also indicated that the economy has experienced “a return to moderate economic growth following a pause late last year.”
Interestingly, Kansas City Fed President Esther George expressed her dissent from the FOMC’s decision (for the second meeting in a row), saying she was “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances.”
I couldn’t agree more.
I think it’s safe to say that nearly everyone on Wall Street knows this Fed-fueled rally isn’t going to end well, but for now, the fast-money is riding the Fed’s monetary wave. How long will this last, and will the Street continue to jump on the Fed’s wagon? That’s the million dollar question.
Meanwhile, there’s been a lot of action on the international front. On Monday, the world woke up to the possibility that private bank accounts would be “taxed” in Cyprus. This proposal was part of the European Union’s (EU) plan to raise enough money to bail out the island-nation and to ensure a fiscally stable EU. But Cypriots rejected this idea overwhelmingly, as that nation’s parliament voted down the measure by a huge margin.
Although EU policymakers have moved to re-jigger their bailout plan, the notion of a confiscatory grab on existing bank deposits is something that is causing no-small spike in fear among the free world.
Can government do that here?
Well, I wouldn’t have thought so, but the recent Supreme Court decision in the ObamaCare case that forces every American to buy health insurance or pay a fine, or tax, is something I never thought I’d see either.
Meanwhile, there’s been a lot of selling in stocks pegged to the second-largest economy in the world, China. The chart here of the iShares FTSE China 25 Index Fund (FXI) shows the recent plunge in large-cap Chinese stocks.
The catalyst for the recent selling in FXI was a JPMorgan downgrade of the country’s equities, with analyst Adrian Mowat explaining, “The post stimulus policy environment is challenging with slowing growth and inflation fears.” Mowat added, “Growth momentum is now slowing with policy response constrained; a nasty combination.”
In today’s trading, FXI did rebound off of its 200-day moving average, and what we could be seeing is the beginning of a rebound in FXI. Still, I would remain cautious here before considering any new allocation to Chinese stocks given the uncertainty surrounding the health of that country’s economy.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
