Thoughts

Yesterdays decision by the US Federal Reserve should set the tone for the next little while and give some certainty to very uncertain markets. The new measures don't really inject any new funding into the system they just dont reduce the amount of government money being injected. I was asked the other day by a young guy I am helping teach some trading methods too exactly what is Quantitive Easing, so here goes my explanation:

"A central bank's way of injecting liquidity into the system to help stave of deflation and recessions, they do this by taking money they created (printed), and use this money to buy assets with, hence injecting it into the system. These assets may consist of Government Bonds, Mortage Bonds etc. The main sellers of this stuff are banks and big institutions who have vast holdings. This increase in the supply of money hence stimulates the economy (well its supposed to) thats the theory anyway."

I am not one for past history but sometimes its handy at gettings clues, extra cash in the system basically only means one thing that banks and other large instiutions will have spare funds from which they ultimately want to find a good yield for, so given this scenario my thoughts are that this extra money will find it way into the markets.

I also think that US treasuries are at all time high time prices with the market particpants saying for months their is a bubble in bonds and certaintly the Central Bank won't be buying treasuries at extremes, they will be waiting for dips to buy. I note with some interest that Warren Buffett has said that he will start to sell out of a lot of his bond holdings, I am thinking that Mr Buffett is just getting out cause the yield is so poor, however market players will say that this validates the bubble theory.

So whats it all mean, If bond prices come down, this will see some relief in yen strength. More QE in the US system will spur the share markets and weaken the USD. When the dust settles in the next few weeks we shall get a lot of answers I suspect.