Exchange traded funds could see big swings and trading volume on Friday as markets focus on any hints of further quantitative easing from the Federal Reserve in a speech by Fed Chairman Ben Bernanke.
ETFs have seen volume rise during the recent market turbulence. [ETF Trading Volume Spikes with Volatility]
Investors will be looking for the Fed’s views on the economy and the chance of more stimulus as Bernanke gives an address at the Kansas City Fed Symposium in Jackson Hole.
“The Federal Reserve remains in the spotlight, with many observers wondering what, if anything, Fed officials can do to help promote economic growth,” said BlackRock strategists in a report this week.
“To start, it is important to remember that the Fed has already done quite a bit — it’s announcement that interest rates will remain at a near-zero level for the next couple of years was a dramatic statement and one that many would classify as a de-facto form of easing,” said BlackRock, which manages the iShares ETFs.
The Fed has promised to keep its target interest rate for overnight loans at record lows until mid-2013.
However, there is speculation the Fed may take further steps due to weak economic data, the recent sell-off in stocks and commodities, and the Eurozone debt crisis.
The BlackRock analysts said one question is whether the Fed will try to stimulate the economy by bringing rates down or improve the health of the banking sector. [Stock ETFs Waver Before Jackson Hole]
“So what might future Fed action look like? It is possible that the Fed could engage in a new round of quantitative easing (i.e., QE3) by kicking off a new asset-purchase program, but we find this to be an unlikely prospect,” they wrote.
“More likely would be a decision to lower the rates the Fed pays on bank reserves in an attempt to stimulate more lending, which would bring the shorter end of the yield curve even lower than where it is today,” the report said. “Another possibility could be an ‘operation twist’ in which the Fed uses its balance sheet reinvestments to shift to longer-dated assets, which would have the opposite effect on the yield curve, pulling down longer-term rates.”
Stock ETFs were lower Thursday while gold advanced slightly following its recent pullback. Investors could be disappointed if Bernanke on Friday doesn’t drop any hints on QE3. [Gold ETFs Look to Bernanke]
“The uncertainty over the future of Fed action is clearly one of the risks faced by investors,” BlackRock noted. “The central bank likely wants to remain on hold until more information is available, but continued deterioration in financial markets would likely increase the odds that the Fed would ease in some way.”
iShares S&P 500 (NYSEArca: IVV)
