While you were sleeping: German green light for Fed

Thursday 13th September 2012

After a German court paved the way for the creation of a European Union bailout fund, investors took a collective sigh of relief and refocused on whether the US Federal Reserve will announce a new round of bond-buying tomorrow.

In late afternoon trading in New York, the Dow Jones Industrial Average edged 0.05 percent higher, the Standard & Poor's 500 advanced 0.25 percent, while the Nasdaq Composite Index eked out a 0.04 percent gain.

"All eyes are expecting some sort of quantitative easing," Joseph Tanious, a New York-based strategist at JPMorgan Funds, told Bloomberg News. "Central bank accommodation has been what's helped propel this market higher."

Economists polled by Reuters dropped their forecasts for American third-quarter growth to 1.7 percent at the same time as they lifted the odds of QE3 to 65 percent from the 60 percent chance that was seen as recently as August's poll.

Fed chairman Ben Bernanke and other US central bank policymakers have begun their scheduled two-day meeting. Bets are that they will announce a third round of asset purchases as well as extend a pledge to keep interest rates at record low levels.

Investors on both sides of the Atlantic applauded the decision by Germany's Federal Constitutional Court earlier today to back the country's ratification of the 500 billion-euro rescue fund for the euro zone as well as a budget pact championed by Chancellor Angela Merkel.

"The tail risk is being eliminated in Europe. Getting the ruling from the German Constitutional Court reinforces that we're stepping in the right direction," Tanious said.

The euro strengthened as a result, last up 0.3 percent to US$1.2894 after earlier rising to a four-month high.

Separately, investors were focused on the outcome of Wednesday's national elections in the Netherlands and continued speculation about when Spain will ask for a full financial bailout.

In corporate news, BAE of the UK and France's EADS said they are in advanced merger talks. If they combine their businesses, the new entity would overtake Boeing as the world's biggest defence and aerospace company in terms of sales.

Helping Apple shares, last up 0.6 percent, was the unveiling of the iPhone 5. The new iPhone will go on sale Friday from US$199, sporting a 4-inch "retina" display, ability to surf a high-speed 4G LTE wireless network, and is 20 percent lighter than the previous iPhone 4S, according to Reuters.

Analysts expect 10-12 million iPhone5's to be sold in the next month. The company has sold almost 250 million iPhones since launching the product in 2007.

Europe's Stoxx 600 Index finished the day with a 0.1 percent gain, closing at its highest level since July 2011.

BusinessDesk.co.nz

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