Asian and European markets higher after the Fed's 'surprise' (depending on whom one speaks to) cut in the discount rate Friday. Yen is lower and the usual carry-trade suspects (NZD, AUD, etc) are higher. It seems that some calm has returned and traders/investors are tentatively taking some risk.
However, the reduction in the discount rate does not change the fundamentals. Monetary policy in the US remains tight given the economic situation. I think the markets are starting to realise that all is not as rosy on Main St. as the bulls/economists would have us believe.
There is speculation whether the reduction in the discount rate is a signal that the Fed will cut at its next meeting, or whether it was merely a sop to the markets to try to calm the situation. I don't think the Fed knows for certain what it will do at the next meeting. If markets continue to fall and the situation morphs into a true crisis, the Fed will probably cut. But if markets recover, the Fed will probably not. The strange logic is that the market is more likely to rally if it thinks that the Fed is going to cut....you can run yourself in circles here.
When the Fed finally does cut, it will probably be greeted with great joy. But as the markets see that it is having limited effect on the real economy, they will dispair. The first cuts never seem to have any impact, just as the first increases never seem to have any impact.
MARKET POSITION: SHORT (4 units)
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