Recap: Week Ending October 31, 2014

October 31, 2014

Markets once again roared higher last week once again as equities are within reach of making new all time highs. Last week the Dow Jones Industrial Average rose 3.48%, making it the strongest among its US counterparts. The Toronto Stock Exchange Composite Index, also known as the TSX, was only able to gain 0.48% on the week as the energy complex once again did not perform relatively well. Last week may have been one of the busiest on the economic calendar with extreme market moving data being released almost every day last week. The busy week comes as the S&P 500 rallied almost 11% off the lows from the middle of October. It appears the market is once again back in rally mode.

Wednesday saw the release of the Federal Reserve Interest Rate decision. The US Fed decided to keep rates low at 0.25% until at least next meeting. It was also announced that the Fed’s bond-buying program known as Quantitative Easing was eliminated. This means that the market will no longer be under the impact of the Fed pumping money into the economy with the intention of keeping interest rates low. This means that the next move for the Fed will eventually be a rise in interest rates; the question is when. The Fed came out with a statement saying, “Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.” This statement appeared rather hawkish, however, it was followed up by a much more dovish stance, “The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” It appears from this statement that low rates are here for some time. The markets did not know how to react to the news and close relatively flat on the day Wednesday. After digesting the news overnight markets soared as the conditions for cheap money are here for the foreseen future.

The big market moving news Friday came from the Bank of Japan, BoJ, which announced that they will expand their monetary base in the form of pumping more stimulus into the Japanese economy. This means the central bank of Japan will purchase 80 trillion yen, an increase from the previous 60-70 trillion yen. The move comes as a shock the economic community which was not expecting such an announcement. Japan is attempting to inflate its currency with the intention of pushing interest rates lower to increase spending. Currently, the Japanese economy is taking a beating. Construction Orders year over year for the month of September came in down -40.3%, down from a previous reading of +8.6%. The introduction of an increase in stimulus, which is also known as simply printing money, makes one wonder if the increase will actually support the economy and is it even possible to return to normal following the push lower in rates. The announcement sent the Nikkei Average 4.83% higher Friday. The announcement also sent investors flocking to JPY bonds that may be the safest place for money in an economy which experiencing inflation as investors don’t want to invest in foreign bonds and experience a weakening yen.

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