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While you were sleeping: Fed bullishness prevails, for now

Wednesday 12th September 2012

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Stocks advanced on Wall Street and in Europe as investors bet the US Federal Reserve will announce a round of fresh stimulus measures this week.

First though is tomorrow's ruling by Germany's Federal Constitutional Court on the legality of the country's participation in the euro zone's rescue fund set up to help ease high borrowing costs of struggling member nations. A negative ruling would jeopardise the creation of the fund.

In late afternoon trading in New York, the Dow Jones Industrial Average gained 0.66 percent, the Standard & Poor's 500 rose 0.45 percent, while the Nasdaq Composite Index advanced 0.20 percent

Europe's Stoxx 600 Index ended the day with a 0.3 percent increase on the previous close. National benchmark indexes rose in France, gaining 0.9 percent, and Germany, climbing 1.3 percent.

The Federal Open Market Committee begins its two-day meeting on Wednesday.

"The market is anticipating that there will be some stimulus move on the part of the Fed," John Praveen, chief investment strategist at Prudential International Investments Advisers, told Bloomberg News. "The market is grinding higher on liquidity because of what central banks have done and on hopes of further stimulus from the Fed and positive moves from European policy makers."

The impact of Europe's ongoing sovereign debt struggles was clear in the latest US trade data. The American trade gap rose to US$42 billion in July from US$41.9 billion in the prior month, according to the Commerce Department.

Exports to the European Union dropped 11.7 percent in July, widening the US trade deficit with the EU to the largest since October 2007.

"The global volume of trade is slowing because of the weakening global economy. But the ripples in the US have not been too severe, so it's not a growth stopper at all," Pierre Ellis, senior global economist at Decision Economics in New York, told New York.

Still, Moody's Investors Service warned today that it might cut America's top credit rating, as Standard & Poor's already did last year, if next year's budget talks fail to ease the nation's debt.

If budget negotiations in 2013 "lead to specific policies that produce a stabilisation and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable," Moody's said in a statement. "If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."

On a brighter note, Chinese Premier Wen Jiabao said the nation is confident in its ability to meet its economic goals for the year.

"Be it monetary or fiscal, we still have ample strength," Wen said yesterday at the World Economic Forum in the Chinese city of Tianjin, according to Bloomberg.

BusinessDesk.co.nz

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