According to most Fed surveys, nearly 90% of market participants believe the European Central Bank will purchase more sovereign debt and 80% said they expect the Federal Reserve will undertake additional quantitative easing. This is a big jump from June and brings us back to October of 2010, when over 90% of the traders polled thought the Fed would do a QE2 program. Here is the catch: Most people do not think a QE will be announced today. Many people think it is coming but that the program will not start until September, while others think it won’t be until the beginning of 2013.
The effect of the upcoming announcements has curtailed trading on the floor in most of the markets. While the commodity markets continue to be busy, the financials ”” bond, index and currency futures ”” were all very slow and the volumes showed that. At 2:00 CT the S&P only had a 8-handle range on volume of 1.4mil, that may sound like a lot but it’s not. When you subtract the 300k ESUs from Globex, only 1.1mil ESUs traded. That is well off the record 6.5mil contracts the e-mini S&P was doing just a few years ago. Part of this has to do with the public risk appetite and the other is the credit crisis. Volumes are down for a lot of reasons, but the main one is most people / traders just do not have the capital they used to.
As we go into today’s Fed decision, we all know the government needs to do more. As the Fed tried to expand growth (GDP), they are doing it the same way they have done in the past: pile up more debt and push out paying it back. With the economy so weak and the stock market going better, one has to question the overall rationale. Dennis Gartman believes “The biggest test facing the U.S. economy is that we shall do something truly stupid: raise taxes and cut spending aggressively, doing immeasurable damage to the economy in the process.”