The FTSE 100 posted a weekly loss of 1.15% to trim its monthly gain to 1.9% after a report in the Wall Street Journal poured cold water on expectations of a massive quantitative easing from the Federal Reserve.
Investors are anxiously waiting for the Fed’s upcoming policy meeting that will take place on 2-3 November and will likely result in an announcement of another round of asset purchases.
The consensus forecast was that the Fed would undertake a US$2 trillion QE round after Goldman Sachs (NYSE:GS) analysts predicted that the Fed would have to unleash a total US$2 trillion stimulus programme that would kick off with a US$500 billion package stretched over six months next week.
However, the Wall Street Journal suggested that the Fed would take a more cautious approach, announcing a stimulus round of a few hundred billion dollars spread over a few months, allowing it to adjust it depending on the impact QE2 has on the economy to minimise policy risks.
Anticipation of further bond purchases has been driving commodities and equities as another round of QE would lead to higher economic activity, increasing demand for energy and raw materials.
This was the main driving force behind the FTSE 100’s recent surge that put the blue chip index above the 5,700 level.
This week’s macroeconomic updates seemed to support the case for a smaller QE, showing positive GDP, employment and home sales data. On Thursday, the US Labor Department reported that initial jobless claims in the US unexpectedly dropped 21,000 last week, hitting the lowest level in three months at 434,000.
The less volatile four week moving average declined to 453,250.
This was followed by Friday’s US GDP data, which showed that US GDP expanded at an annualised rate of 2% in 3Q compared to growth of 1.7% in Q2 and 3.7% in 1Q, meeting market expectations.
Investors received more good news later when the Chicago PMI (Purchasing Managers Index) was reported to have climbed from 60.4 in September to 60.6 in October, while analysts expected to see a decline.
However, the University of Michigan consumer sentiment index for October was unexpectedly revised downwards from 67.9 to 67.7 compared to 68.2 in September, showing a decline in consumer confidence in the US.
On Monday, the National Association of Realtors (NAR) said that existing home sales jumped 10% month on month in September, which was the fastest growth in 28 years. However, the annualized rate of 4.53 million achieved during the month marked a 19.1% decline from September 2009.
Later in the week, the US Commerce Department said that new home sales rose 6.6% to an annual rate of 307,000 in September.
The FTSE 100 closed flat on Friday after rising briefly on the back of the US GDP and manufacturing data. The Dow Jones and S&P 500 indexes in the US also closed almost unchanged from their respective opening levels.
The Dow Jones Industrial Average rose 3.1% during the month of October, while the broader S&P 500 advanced 3.7%.