**13/10/10 - 8.45am - by James Gerrish**
All aboard the QE2 was the underlying message from the minutes of the Federal Reserve's last meeting. QE2 refers to further asset purchases under the banner of quantitative easing. The minutes (released overnight from the meeting on Sept 21) showed the Fed was ready "before long" to increase purchases of Treasuries. This means the Fed prints money and buys back its own debt securities to increase liquidity in the system.
My main concern at this juncture is that Quantitative Easing doesn't eventuate to the extent the market has already priced in. This would then lead to a short term bounce in the USD and weakness in the commodity and equity markets. There is yet to be any material signs that this will play out however I think its prudent to keep this scenario at the back of our minds when making investment decisions.
The recent rally in equities has been driven by commodities. Buying into commodities has occurred as result of USD weakness and the growing realisation that demand for raw materials in the emerging market space is here to stay. If we take a look at the chart of the S&P Financials v S&P Materials v S&P 200 its obvious to see the strong buying amongst commodity producers.
Traditionally, when we see a sector significantly out pace the broader market (like the Materials have) that sector often re-correlates or falls back into line. I think this is what we need to be conscious of with resource stocks in general. Make no mistake, I'm certainly still bullish the commodity story however its all about timing of when to gain exposure to it.
On the market last night, the DOW JONES added +10 points or +0.09% to close at 11,020. In London the FTSE 100 lost -4 points or -0.07% to 5668. Locally, SPI FUTURES are pricing in a rise of +35 points on the market this morning.
