The S&P 500 is up 1.2% currently following the announcement of new QE. This is not unlike the pattern that we saw in 2010 where the market rallied out of the summer on the expectation that there would be more QE and rose again on the day that QE was announced. However, over the next 8 trading days immediately following the announcement of QE2 the market fell 4.4% as it consolidated. It then continued to rally for about 2.5 more months.
Consensus seems to be growing that the Fed is definitely going to announce some sort of new QE today. From an academic standpoint QE is supposed to lower interest rates in order to spur lending and economic activity, but as a reminder the last two times that there have been unsterilized printing programs rates have actually risen because QE has created the appearance of inflation. Only operation twist, a sterilized maturity swap program has been effective at flattening the yield curve. Below is a chart of the 10 year yield with QE dates highlighted.
Given that Mario Draghi announced unlimited asset purchases last week, equity markets have been rallying along side the Euro; however, if Draghi ends up exercising his buying power and Bernanke doesn’t announce more QE tomorrow, the Euro rally may be short lived. Since 2009 (as theory would predict) the value of EUR/USD has been closely linked with the relative size of each central bank’s balance sheet. The more that the Fed prints, the more the EUR gains against the dollar. The more the ECB prints, the more the EUR falls against the dollar.