Fed Tapers, ETFs On The Move (SPY, GLD, TLT, UUP)
The day has finally arrived, the Fed has begun its taper.
The Fed announced it will continue to make monthly asset purchases, but at a $75 billion per month pace versus the previous $85 billion per month. In the end, the $10 billion taper per month is a drop in the bucket and that is why the market is reacting as it is.
SPDR S&P 500 ETF (NYSE: SPY)
Immediately after the announcement the stock market rallied and SPY moved from a slight loss for the day to a gain of over 1 percent. The rally has the SPY at the best level in a week and is now sitting just 0.5 percent below an all-time high.
It is clear the market had already priced in the $10 billion taper and is happy the Fed is beginning to show a plan versus the uncertainty that has been looming over the asset purchase program.
PowerShares U.S. Dollar Index Bullish ETF (NYSE: UUP)
The tapering should be a bullish move for the greenback as other countries around the world continue to push stimulus and lower the value of their respective currencies. That was not the reaction in UUP after the Fed announced the taper; the ETF, which was quiet, the majority of the day began to fall after the news hit the wire.
The reaction could be chalked up to similar action in SPY, the market sees the $10 billion taper and small potatoes and is not ready for the U.S. Dollar to begin a rally as of yet.
SPDR Gold ETF (NYSE: GLD)
The reaction from gold has been choppy as the metal originally rallied to the high of the day before drifting back near the break-even point within the hour.
A weak U.S. Dollar and a small taper should be bullish for the precious metal and GLD and this is why the original move was higher. However, the longer-term trend for gold is bearish and it appears the rally was merely a chance to sell the commodity.
iShares 20+ Year Treasury Bond ETF (NYSE: TLT)
Another ETF that had an initial reaction that was positive, did not hold the gains and within 45 minutes the bond market began to fall again. A taper would likely lead to higher interest rates, which would lead to lower bond prices and lower prices for TLT. But due to the low amount for the taper it appears the market is torn as to which direction bonds go in the near term.
The Fed did make it clear that the Fed Funds rate would remain low for what appears to be the foreseeable future. It is also clear that interest rates will eventually increase as the Fed stops artificially keeping them down. TLT could be in for a wild ride over the next couple of weeks with the longer-term trend negative.
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