The Markets

QE or not QE …. Make up your mind?

Last week, investors and traders obsessed about the U.S. Federal Reserve (Fed) and the possibility it might begin to end its quantitative easing (QE) program. The Fed began its first round of quantitative easing during the financial crisis in an effort to prop up the American economy. In general, quantitative easing helps increase money supply and promote lending and liquidity. Investors’ fears about what may happen when the program ends were apparent when, despite abundant positive economic news, major world stock markets lost value last week.

The most recent round QE3 or as it’s become known ‘QE-Infinity’ started on 13 September 2012 at $40 billion per month, increase on 12 December 2012 to $85 billion per month – more than the annual GDP of Cuba!

Back home in the UK for the past three months, three MPC members, including the outgoing governor Sir Mervyn King, have advocated a £25bn extension of QE, but been outvoted by their colleagues, who are concerned that inflation remains well above the government’s 2% target.

Howard Archer, of consultancy IHS Global Insight, said Thursday’s vote may have been even closer.

“The Bank of England’s decision to hold off from quantitative easing was once again likely the result of a tightly split vote. Indeed, it may even have been as close as 5-4,” he said, adding that independent economist Martin Weale may have joined the dovish camp, “given his recent comments on more benign inflation developments resulting from lower oil and commodity prices as well as ongoing low earnings growth”.

The MPC next meet on the 5^th and 6^th June and the minutes will be released on the 19^th – watch this space.

Stock markets generally finished higher for the month of May despite last week’s performance. The FTSE All-Share Index gained 2.1 percent, the U.S. Standard & Poor’s 500 Index rose by 3.0 percent, however some Asian and emerging markets finished lower for the month.

Treasuries, however, delivered a poor monthly performance. During the last four weeks, yields on 10-year Government bonds notes rose from 1.6 percent to 1.97 percent – an increase of almost 40 basis points.