As expected, the Fed decided to taper bond buying by a further $10bn during its January FOMC meeting, bringing treasury purchases down to $35bn from $40bn and MBS purchases down to $30bn from $35bn while leaving the Fed funds rate unchanged at 0.25%.
The move put pressure on global equities which further curbed risk appetite owing to a fragile Chinese economic outlook. The contraction in China’s manufacturing sector for the first time since July last year was confirmed by a weaker HSBC/Markit PMI reading of 49.5 for January. European equity markets struggled throughout the day with London’s blue chip index spending the majority of the session under pressure despite gaining some support from a bullish US open towards the end of the day. Activity on the index posted an inside day today after yesterday’s outside day as investors struggled with direction as the index closed 0.09% lower.
Wider European markets were buoyed by encouraging data as a sharp decline in German unemployment, which fell 28,000 in January against a more modest 5,000 decline expected by market participants, supported the DAX 0.39% higher. However, gains were capped as German inflation softened slightly to 1.3% m/m, putting pressure on the euro and prompting moves into Bunds as investors anticipated a continuation of the expansionary ECB stance, causing yields to drop towards 0.1% for the first time since November last year.
Wall Street opened higher, encouraged by a Q4 GDP growth figure which was in line with expectations at 3.2%. At the time of writing, both the S&P 500 and DJIA were trading 1% and 0.7% respectively higher despite a 19,000 rise in initial jobless claims and a surprise 8.7% m/m drop in pending home sales in December.
Gold prices retraced a significant portion of the previous week’s gains after trailing 1.9% lower on the tapering outlook, with bearish price moves this week looking set to snap a five week price rally in the yellow metal. Gains in the dollar index, which was last trading at 80.980, have put pressure on spot prices today with fading physical demand from Chinese buyers of the Lunar New Year celebrations putting further pressure on prices.