US stock markets open down on back of Fed decision, manager reaction on impact mixed

Early trading in US equities markets saw major indices fall unanimously, with the Dow, S&P 500 and Nasdaq all dropping quickly by more than 2%. European fund managers’ reactions to the expected impact of Ben Bernanke’s announcement were mixed ahead of markets opening.

It was a bone of contention among fund managers as reaction poured out this morning as to whether the Federal Reserve’s move to calm recent market volatility by declaring interest rates will remain at a historic low of 0% until 2013 ahead of major indices opening today would do any good.

Early trading in the US suggested the decision fell short of what those markets wanted. Just over half an hour into major US indices opening, the Dow had sunk a further 3.1%, while both the Nasdaq Composite Index and the S&P 500 were dangerously near that 3% dip, falling by 2.9% and 2.7% respectively.

The changes follow days of volatility for financial markets globally, with actions by policymakers seeming to fall foul of anything more than short term reassurance.

Investment director at UK fund manager Montague Capital David Jones said the decision failed to boost the credibility of the Federal Reserve, negatively impacting on the overall perception of the US.

“Despite the sense of crisis pervading markets, this does not have the veneer of decisiveness that the ECB’s bond purchases did on Monday. Three out of the ten members of the Fed’s open market committee voted against it, and not to ask for something bolder. 

“If the global economy needs fresh guidance, the US is no longer the place to look for it,” he said.

Others, including chief economist and strategist at Schroders Keith Wade said the Fed’s move will have a positive impact on financial markets.

“It is not another round of Quantitative Easing – QE3 as some had hoped – but it may be the next best thing. US bond yields have fallen to record lows, equity markets have rallied and the dollar has weakened – all of which will help reflate the ailing US economy.

“Three cheers for Ben Bernanke as he rides to the rescue once more!” said Wade.

In the short term, Bernanke’s rescue does not appear successful.

European equity markets fell soon after the news US markets had failed to revive their confidence, despite opening up this morning as Asia had overnight.

Italy’s FTSE MIB Index lost more than 5.5% by 15.11 GMT, or 10.11 ET, not long after US markets opened.

Germany’s Dax shed more than 1.7% in under half an hour of US markets opening, the Eurostoxx 50 made up of largely German stocks suffered a 3.3% fall in just over half an hour of the news spreading, while France’s Cac 40 sank 3.3%. The UK’s FTSE 100 similarly saw a 1.6% drop.

But partner at Cheviot Asset Management David Miller thinks the Federal Reserve’s decision will boost the global economy in the longer term.

“Weak currency induced inflation will be a way of reducing the real value of US debt and which would be beneficial to industry. It will be positive for US equities, positive for the Euro, and will reduce Chinese growth to a more normal level,” he said.

Skandia Investment Group portfolio manager Anthony Gillham warned policymakers in the West are failing to offer long term answers to market fragility, however.  “Solutions thus far are no more than sticking plasters. This is currently most acute in Europe but applies equally in the US.”


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