Stock markets tumble after Operation Twist … and doubt

Stock markets tumbled on Thursday and the pound slumped to a one-year low against the US dollar as investors took fright at a gloomy warning about the world economic outlook from the US central bank.
The US Federal Reserve's Operation Twist – its latest attempt to stimulate the American economy – failed to calm financial markets. The FTSE 100 index in London plunged 266 points to 5022, a 5% drop. Other European markets also suffered heavy losses.
In Asia, the Nikkei closed down 2.1%, Hong Kong's Hang Seng tumbled 4.9% and the Jakarta stock market lost nearly 9%. On Wall Street, the Dow Jones index fell 3% in early trading, down 346 points at 10,778.
The sell-off came after the Fed unveiled a $400bn (£260bn) bond-buying plan on Wednesday to ward off a double-dip recession.
Investors rushed to the safety of the US dollar, driving the pound down by one and a half cents to $1.5328, the lowest level since September 2010. The gold price also fell, losing almost $50 an ounce to $1,729.
The City had been "left reeling" by the sharply negative tone adopted by the Fed on Wednesday night, when it warned that the US economic recovery was at risk, said Joshua Raymond, chief market strategist at City Index.
"The negative tone struck by the Fed in terms of the serious headwinds and downside risks facing the US economy sent a ripple through the markets," said Raymond.
In Europe, the European Central Bank came under pressure to take action itself after a worsening in the services and manufacturing sectors sparked warnings that the economic recovery was definitely over. This was exacerbated by news that industrial orders in the eurozone slid for the second month in a row in July.

Federal Reserve gloom

The Fed's open markets committee said the economic outlook had deteriorated sharply, noting there were "significant downside risks" to its economic forecasts and indicating that a full recovery was years away. "Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated," it said.
This drove the Dow Jones down 2.5% on Wednesday, while the Standard & Poor's 500 index lost 3%. The dollar hit a seven-month high on Thursday as investors scrambled for safety.
Commodities tumbled on news that Chinese factory output had shrunk for a third month in September as flagging overseas demand put the brakes on new orders. Brent crude oil lost more than $2 to $107.50 a barrel, while US crude dropped $3 to $82.92 a barrel. Copper lost 3.3% on the London Metal Exchange, falling to a 10-month low of $8,028.75 a tonne.
"It is another blow after the Fed's language about downside risks on the economy really hurt sentiment," David Thurtell of Citigroup in Singapore told Reuters.
The Fed's move came on same day that the Bank of England was also getting ready to pump more money into the British economy.

Double twist

"Operation Twist", named after a similar measure launched in the 1960s under President Kennedy, will see the Fed buying $400bn (£258bn) of long-term Treasury bonds by June 2012 and selling shorter-term debts. The measure is aimed at driving down long-term interest rates across the economy, in an attempt to reduce the cost of borrowing for indebted homeowners and struggling firms.
In another effort to help the ailing US housing market, the Fed chairman, Ben Bernanke, said that as the mortgage-backed securities it owns matured, it would reinvest the proceeds in buying new mortgage bonds. Economists called the measures a "double twist".
Gary Jenkins, head of fixed income at Evolution Securities, said: "Twist and doubt? You have to hand it to the Fed. They have gone all retro on us and persuaded the market to call their latest attempt at intervention 'Operation Twist' rather than 'QE 3'. The latter might imply that the first two attempts didn't quite work out as hoped so far better to change the name."
He added: "The basic idea is of course to stimulate economic growth by persuading investors into risk assets … the one thing that is clear is that Mr Bernanke is prepared to use all the weapons in his armoury in order to try and ensure that the US does not enter a long period of low growth, so Operation Twist may not be the last intervention unless it works. And of course the UK is about to follow suit."
Paul Ashworth, chief US economist at Capital Economics, was not convinced Operation Twist would do much good. "The big question is whether this latest action will accomplish anything. We doubt it. Judging by the modest rally in 10-year treasury yields since the announcement, most of this was already priced in.
"More generally, the cost of borrowing simply isn't the problem. Businesses don't have the confidence to invest and half of all mortgage borrowers don't have the home equity needed to refinance at lower rates."

by Julia Kollewe taken from http://www.guardian.co.uk/business/2011/sep/22/stock-markets-tumble-operation-twist