KEY UPDATES
Beyond QE3
Last week the Fed delivered its new round of QE3,
while the German Constitutional Court finally approved the European Emergency
Fund, smoothing the German participation within the fund, but not without
setting tough conditions.
According to the Fed’s statement, the central bank
will purchase $40 billion worth of mortgage debt each month until the labor
market shows sustainable progress. The aim of this action is to suppress the
cost of borrowing to buy a home as prices rise and yields fall. Falling yields
in mortgage may push investors to leave the mortgage bonds and turn towards
buying other assets. As demand goes elsewhere, such as corporate bonds, these
bond prices will go up and yields will go down. Hence, borrowing costs will
fall, enabling individuals or companies to borrow at cheaper price.
To conduct this operation, the Fed credits accounts
of the banks from which it purchases the debts. In effect, money is added into
the system. Afterwards, it will be up to the banks to lend the money to
businesses and/or individuals who in turn, will use the money for spending.
More spending, more hiring, and thus, more economic activities.
While studies show that the Fed’s move may reduce
borrowing costs, how such condition would impact the economy remains unclear.
The $600-billion-QE2 for example, according to studies, created 700,000 new
jobs. The question is, however, how long would it take to effect and how long
(should it take effect) would it last?
No Surprises
from Vosskuhle
As the top German of the week last week, Andreas
Vosskuhle handed out a somewhat win-win decision on the European bailout fund
ruling. The constitutional court approved the European bailout fund which
cleared the throat for a while but not necessarily the cure for European
crisis. At least, that cleared one fog over the matter as the zone can now move
on to decide how they can make use of the fund to end the crisis.
The German ruling was not without a catch, however.
The court stated that Germany’s involvement in the fund will be strictly
limited to $244 billion. If the amount should be increase beyond that
threshold, the parliament should approve it with both upper and lower houses
must be kept fully informed. Germany must also ensure that it is now entirely bound
by the ESM Treaty and that some reservations must exist should the ESM do not
serve the German public interest.
Uncharted
Territories
Nevertheless, the markets cheer the Fed’s move as
well as Vosskuhle’s ruling, and Jakarta Composite Index zoomed to uncharted
territories on Friday. The new week also potentially bullish for the moment as
the residual euphoria remains intact, although at a reduced rate.
As the key resistance level at 4,235 had been
broken, the JCI leaped past its subsequent Fibonacci target at 4,263.65 and
went to as high as 4,269.05. So, this brings the next target into the radar:
4,652.06. Of course, it’s a long shot at the moment, but its 10% distance from
the current level seems to be attainable this year. On the flip side of the coin,
the support for JCI is seen at 4,235 as prior resistance turns into support.
Portfolio
Update
BMTR continued to climb higher, but somewhat stalled
at 1,900. The position remains on hold for now, but we ought to stay cautious.
Near-term target is seen at 1,910, and subsequently 2,180. Other components of
the portfolio remain in the red, however, but the positive development on Friday
improved the total portfolio by 1.19%.
Written by Unknown
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