Market chaos following “Operation Twist”

The US Federal Reserve’s much anticipated “Operation Twist” certainly made an impact on equity markets overnight, the S&P 500 index of American stocks tumbled almost 3% largely on the rhetoric from Fed Chairman Ben Bernanke. Despite going ahead with the rebalancing of its Treasury portfolio by purchasing $400 billion of longer term Treasury bonds (funded by selling an equivalent value of shorter dated ones), investors focused on warnings of significant risks to the already weak US economy.

European Equities opened dramatically lower, the FTSE losing ground to find itself off by more than 5% (250 points) at one stage, with similar losses seen on the CAC40 and DAX. Sentiment was further hit by weak economic data out of Europe and China, the former via German and French Services and Manufacturing PMI which both came in below already pessimistic forecasts. As for China, a HSBC PMI survey fell to a two month low of 49.4 in September, citing concerns over the country’s largest export markets, Europe and the US. The heightened growth fears led to a flight from economically sensitive assets that saw commodities smashed, Brent Crude falling more than 5% on the day to $106 per barrel and copper dipping to its lowest level in more than a year. The worst five performing stocks on the FTSE 100 were all mining companies, even industry giant Rio Tinto was not spared decimation as it joined the list of miners whose share prices fell by more than 10%.

At a stock specific level, we had to venture into the FTSE 350 to find anything positive; here EasyJet raised its guidance for the year to September 2011. The robust outlook was in stark contrast to the recent profit warning issued by the German Lufthansa and caused the shares to gain 28p to finish the day up 9% at 340p.

Gold lost 3.7% by the close of London trade to find itself priced at $1730 per troy ounce, a move that was partly a result of the strong gains seen in the dollar. The greenback jumped nearly 1% against most other currencies with the Dollar Index “basket” at a 7 month high amid the flight to safety. The FTSE 100 ended a terrible day at 5042, a loss of 247 points or 4.7%, having found some technical support just above the 5000 level. 

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