The broker points out: "Federal Reserve (and Bank of England) policy is aimed at driving longer-term bond yields lower. Central banks hope that this will alter how investors value equities relative to fixed income and are actively driving up the value of bonds that exist in many investors' portfolios to encourage them to rebalance their assets more towards equities in order to maintain current allocations. These central banks are also attempting to incentivise fund flows into the equity market, in turn theoretically boosting household wealth and making consumers who hold shares feel better off.”
It seems to be working because on the 12 days in the past month when the US Central Bank has bought government bonds as part of the POMO, the S&P 500 has risen nine times, has been flat once and fallen (and modestly so) twice. Charles Stanley has analysed "the POMO effect", noting that you would have outperformed the S&P 500 by two times this year “simply by being long on just the 16 days when you knew in advance that an open market operation was to take place. In addition, six of the seven times when the S&P 500 rallied by 1 per cent or more, operations were conducted on those days.”
This is important right now because the Federal Reserve is half way through its current $32bn purchase programme of US Treasuries which is due to end on 8 November. True to form the rise in the S&P 500 on 15 October, 18 October, 20 October, 22 October and 26 October all coincided with POMOs totalling $16.5bn. However, that still leaves $15.5bn of Treasury purchases to be made on 28 October, 1 November, 4 November and 8 November. It also means that the Federal Reserve’s announcement on 3 November - regarding another possible round of quantitative easing - is likely to have a far larger impact on the future direction of global equity markets than most people would think.
