Index ETFs Erase Gains As Optimism Over Bernanke Talk Fades; Europe Holds Ground

The major index ETFs erased gains today as optimism over Federal Reserve plans to expand its balance sheet faded after Chairman Ben Bernanke warned the central bank doesn’t have the tools to shield the economy from the looming fiscal cliff.

Stocks rallied to session highs after the central bank said it would add $45 billion a month of Treasury securities starting January to its $40 billion a month purchases of mortgage-backed securities, and would keep the Federal Funds rate to near zero so long as the unemployment rate remains above 6.5 percent and inflation rate is not forecast to rise above 2.5 percent.

In its growth forecasts, the Fed said unemployment rate will fall between 7.4 percent and 7.7 percent by the end of 2013. GDP growth outlook for 2013 was lowered between 2.3 percent and 3 percent from its September forecast of at least 2.5 percent growth.

The rally faded after Bernanke said monetary stimulus can not offset the full impact of tax hikes and spending cuts set to go into effect in January should politicians fail to reach a budget deal.

This shifted the gears in reverse as the Dow Jones Industrial Average (DJIA) shed 3 points, halting a five-session winning run while the S&P 500 Index (SPX) managed to barely eke out a 0.64 point gain with financials and basic materials gaining the most and technology faring the worst among its 10 business groups.

Treasuries fell after the Fed announced an open-ended plan to buy $45 billion of US govt. debt every month and linked the central bank’s accommodative policies to unemployment rate and inflation.

European shares traded cautiously higher on Wednesday as investors chose to wait ahead of the US Federal Reserve’s monetary policy decision that was expected to see the central bank provide further stimulus even as American lawmakers continued negotiations on a new budget.

On the economic news front, industrial production in the eurozone slumped 1.4 percent in October, falling short of analysts’ expectations of a 0.4 percent rise.

Trend wise, we did not make much headway in one direction or another as the Domestic  TTI dropped to +1.90% while the International TTI now hovers at +6.58%.

With the Fed meeting being out of the way, the focus will be back on the Fiscal Cliff negotiations, where time is of the essence as recess is scheduled for next Tuesday. The heat is on, and we should know within a week as to whether we’ll be sliding down that slippery slope or not.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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