A fore-taste of the end of QE2?

The New York Fed announced on their website in the past hour that their scheduled Treasury purchases were cancelled for today without giving an explanation as to why.

This had an immediate effect on the markets:

• EURUSD dropped 40 points

• 2 year US treasury yields jumped 3 basis points immediately

• S&P 500 dropped 20 points

• US oil dropped $2 per barrel

15 minutes later the NY Fed announced the cancellation was due to “market volatility” as US Treasuries have risen in price on the back of safe-haven buying since the Japanese crisis. It also re-scheduled the bond purchase for today saying that it will close the auction at 1205 ET/ 1605 GMT.

The timing by the NY Fed could have been better, markets are already gripped by uncertainty caused by the tragic events in Japan and the on-going Middle Eastern crisis. This only added to investors’ confusion, especially since the Fed had committed to completing QE2 as recently as yesterday after the FOMC meeting.

Once the market figured out what the Fed was doing prices reversed, but the immediate reaction tells us two things:

1, the Fed will have to do a good job of signalling what will happen after QE2 to avoid market volatility

2, risky assets may come under pressure once the Fed stops purchasing US Treasuries in June

Today was a false alarm, but it highlights another risk the market faces in the middle of the year.

Source: FOREX.com

16.03.2011