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What QE2 means for your money

Markets have been buoyed by the prospect of more US stimulus but can it continue and what should you buy?

 
What QE2 means for your money

This week US rate-setters decided to pump another $600 billion into the flagging American economy, pushing shares, metal prices and bonds higher.

But can the rally continue and what investments will benefit from the latest round of ‘quantitative easing’?

US action is good news for the pound

The pound surged more than two cents against the dollar after the US Fed's announcement, and was further buoyed by the fact that the Bank of England decided not to do anything more this month to stimulate the UK. That adds to the relative attractiveness of sterling versus the dollar.

Whether that continues depends on the economic data over the months ahead. The recent run of good news could push a second round of quantitative easing off the agenda if inflation remains above target.

In the immediate future Kathleen Brooks, research director at Forex.com, believes the direction of the pound will be driven by the Bank of England's inflation report next week.

‘Investors should be on the look-out for the core price inflation (CPI) projection on Tuesday. If it is still below 2% in 2013, then the BOE is more likely to extend monetary policy support, which is negative for sterling.

On the other hand if it is revised higher that would be positive for sterling, she said.

But she also points out the rally in the pound since the summer has been against the dollar and at the moment the euro is strong because it looks like Europe will withdraw stimulus sooner than the UK.

Shares are seen as another major beneficiary

The stock markets have been a major beneficiary of the first round of quantitative easing and made sharp gains again on Thursday as most commentators believe interest rates will stay low for years to come forcing investors to take on more risk to achieve better returns than they can get on cash.

As a result, most agree that money will flow towards the mining stocks, dividend payers and emerging market shares.

UBS strategist Nick Nelson points out that the ‘best performing European sectors since US QE II was hinted at have been the metals and miners, luxury goods and semiconductors’.

‘We would focus on the miners as being the biggest direct beneficiaries,’ Nelson said.

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14 comments so far. Why not have your say?

Jonathan

Nov 05, 2010 at 14:19

I don't understand why UK stocks should rise on USA Qdevaluation of currencyt through QE?

Do they think that it is now more likely for the UK to folllow this so and devalue the pound?

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Chris B (Slough UK)

Nov 05, 2010 at 14:54

Enjoy the ride, but like all parties, remember to leave just before the end, if you can tell when that is, that is!

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Chris Powell

Nov 05, 2010 at 14:57

The main benefit of QE is that the institutions who sell their bonds to the US governtment will have money to spend on new investments. This will put more money into equities worldwide. This will help companies come to the market to raise money at a cheaper rate (will not need to go to the bank).

The benefits of QE will take a long time but will also be inflationary!

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Nigel Russell

Nov 05, 2010 at 14:59

jonathan, being simplistic worldwide assets respond to devaluation. Most commodities are priced in $.

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Jeremy Bosk

Nov 05, 2010 at 15:02

A weak dollar makes raw materials cheaper in Sterling and exports to the rest of the world cheaper. Most of our exports go to the Eurozone against which the Pound is weaker.

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Andrew Whitehead

Nov 05, 2010 at 15:37

I have a very simplistic approach to investment. Buy low, and sell high. Right now I feel pretty happy and contented with how things have gone for me since August. It has been very good. A bird in the hand and all that, so today I have moved 1/3 of my portfolio into cash. 2/3 remains invested, but any signs of trouble and I shall move another 1/3 over until I am relaxed again. 4 months ago I would have taken todays valuations and grabbed their hands off. Hence my move today. Too good to miss.Take care folks!

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Trevor Woodcock aka Grey Squirrel

Nov 05, 2010 at 16:09

I agree with Andrew. Whenever apparent good news produces an over-reaction I become wary, and inclined to take profits.

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Frankie Dee

Nov 06, 2010 at 13:55

I have another view and have invested more cash into shares on friday personally i feel that things are not as gloomy in the uk and overseas as commentators have suggested.

I am happy to pump into oils as this is a commodity we need oil prices are to rise in the weeks to come and companies like BP have now overcome most of their issues and still look cheap.

If someone asked me in jan where would the FTSE be in Dec i would have said 4500 now 6000 is more realistic I FEEL companies have been cutting costs across the board so these savings will be shown in results to come.

I am nervous about quantative easing as it suggests there are problems but are they rally that bad in the US or is Obama looking show he is douing something.

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david Bhatti

Nov 07, 2010 at 08:21

'When to lock in profits' as the article has suggested is relevent for the current situation for short-terms investors. Quick get away can be frustrating.

I suspect 'getting out' at the right time must be a knack that can only be developed through time.

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Deborah Hyde (Citywire)

Nov 08, 2010 at 15:26

Rob,

Thanks for those questions.

The main reason investors say shares are in a 'sweet spot' as long as the US and other developed countries are willing to do more stimulus is that shares are likely to pay better returns.

More QE basicallymakes the prospect of a US interest rate hike even more unlikely in the months possibly years ahead.

That means there is a lot of investor money sloshing around the globe looking for a home and for now it is heading for dividend paying shares and into emerging markets as investors believe both offer growth and better returns than cash or bonds.

Shares are not reacting to hopes of more UK quantitative easing, which still remains a remote posssibility for now.

There are some more points to consider in the QE part II story at

http://www.citywire.co.uk/money/ask-citywire-quantitative-easing-part-ii/a447558?ref=citywire-money-latest-news-list

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Jonathan

Nov 19, 2010 at 11:54

Does anyone know when the BoE buys bonds back from the banks what price they buy them for. For example if the bank buys back a 5 year bond that was originally sold to the bank and which the BoE pays say 5% interest on but current 5 bond which expire at the same time are being sold by the BoE with an interst of 2%. How much does the BoE pay for the 5% bonds? I was reading an article that said with the American QE that they were buying a lot of bonds from Goldman Sacks at a highly inflated price from the price Goldman's had bought them for. Also that Fed Chairman Ben Bernanke used to work for Goldman Sacks, could there be any corruption there?

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Jeremy Bosk

Nov 19, 2010 at 12:43

Jonathan

The official BoE guide is here:

http://www.bankofengland.co.uk/monetarypolicy/assetpurchases.htm

The price of tradeable bonds goes up and down according to their perceived riskiness. Those risks are that whoever issued them goes bust and they are not repaid at all or that better rates of interest are being offered elsewhere. If you have a bond that pays 5 per cent and someone comes along and offers 10 per cent then you are likely to sell the lower interest bond and buy the higher interest bond. The market equalizes the return you will make by a combination of raising the price of the high rate bond and lowering the price of the low rate bond so that when you spend the same amount buying each, the yield is the same - probably somewhere in the middle. NB this is a very simplified account. You can get more detailed explanations with charts and such to illustrate examples from the likes of the London Stock Exchange, Motley Fool and other investor websites. Maybe even this one, I haven't looked :-).

If Goldman Sachs bought bonds when everyone else was afraid and that fear was later seen to have been exaggerated, they will have made a profit. The Fed will have bought the bonds at the market price so corruption in any narrow sense is unlikely.

There is what economists call moral hazard which means that people buy high yielding, highly risky investments believing that the government will always bail them out if things go wrong. That is more political corruption than financial.

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Jonathan

Nov 19, 2010 at 16:10

Jeremy, I agree, but just the fact that the BoE is buying back bonds puts the price up. And if Goldman Sachs know in advance that QE is about to take place they will buy bonds simply in the knowledge that they will get a good price when QE starts. That's where the corruption could come in as Fed Chairman Ben Bernanke used to work for Goldman Sachs and even said after QE "At least we saved Goldman Sachs"...

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Jeremy Bosk

Nov 19, 2010 at 17:13

Jonathan

Yes, having a large scale buyer puts up the price. Having a large scale seller has the opposite effect. This is the nature of markets.

I seriously doubt that GS knew for certain that quantitative easing would occur far enough in advance to buy up enough cheap bonds to both make a profit and make the risk of imprisonment worth while. Financial cheats in America go to prison for a long long time. Also, the decision to begin QE was not taken by Bernanke alone but by the Federal Open Market Committee whose members are not all ex-employees of GS.

The members of the FOMC during 2010 are:

Members

* Ben S. Bernanke, Board of Governors, Chairman

* William C. Dudley, New York, Vice Chairman

* James B. Bullard, St. Louis

* Elizabeth A. Duke, Board of Governors

* Thomas M. Hoenig, Kansas City

* Sandra Pianalto, Cleveland

* Sarah Bloom Raskin, Board of Governors

* Eric S. Rosengren, Boston

* Daniel K. Tarullo, Board of Governors

* Kevin M. Warsh, Board of Governors

* Janet L. Yellen, Board of Governors

Alternate Members

* Charles L. Evans, Chicago

* Richard W. Fisher, Dallas

* Narayana Kocherlakota, Minneapolis

* Christine M. Cumming, First Vice President, New York

Federal Reserve Bank Rotation on the FOMC

Committee membership changes at the first regularly scheduled meeting of the year.

2010 Members - New York, Cleveland, Boston, St. Louis, Kansas City

2010 Alternate Members - New York, Chicago, Philadelphia, Dallas, Minneapolis

http://www.federalreserve.gov/fomc/

The cities named are where regional Federal Reserve Banks are based. "The Fed." is a federation of regional banks not a single organisation like the Bank of England. Some of the people are political appointees like Bernanke, some are academics, some career bankers.

You could insist that those who regulate banks or run the economy should never have any experience of banking or ever have worked outside government. I am sure you see the flaw in that. You just have to look at the majority of MPs in the UK who may become government ministers.

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