The Fed's decision yesterday has led to a firestorm in the FX market today, as governor after governor of central banks spoke to voice his worries about U.S. policy, with Asians predictably being the most strident protestors. The USD is lower almost universally, with interventions being the norm rather than the exception in most of Asia. Apart from that, stock markets were bullish, as one would expect, gold surged relentlessly to approach $1390 as we write these lines, and EURUSD rose to 1.42. Remarkably, however, even as gold was up by more than 3% on the day, Euro only managed to rise by half a percent because of the alarming jump in the CDS and cash spreads of the European periphery. That gold has more months and years to appreciate is not difficult to see, after all; the USD must fall, yet nobody wants his currency to rise against it, leaving gold as the only credible alternative along with some commodities.

We hope to take a deeper look at the FOMC statement, but it has been analyzed to shreds at many other places, and for now we'll let it suffice to note that, apart from the larger than expected $600 billion in purchases of Treasury paper, the Fed is also planning to reinvest some $250-300 billion in interest and principal repayments, which will bring the QE total to $850-900 billion over the term of the program.

In today's U.S. releases we have the weekly claims rising by 20k to 457,000, but these moves are of little consequence nowadays beyond signalling that the slack in the labor market remains in place. Of far greater significance was the data that showed that Q3 labor costs were lower by 0.1%, demonstrating in unmistakable terms that the Fed's pumping does not flow into where it is intended to. Instead of going into the pockets of consumers and the middle class, the funds that the FED channels into the market end up in the pockets of speculators, who use it to draw foreign (not domestic!) assets higher, creating bubbles, while inflation remains tame, and demand stays sluggish. The Fed should devise new methods to address this crucial issue instead of inventing ever more colorful names and means of pouring cash into the bottomless pockets of the misguided rich speculators.

We hope to take a deeper look at the FOMC statement, but it has been analyzed to shreds at many other places, and for now we'll let it suffice to note that, apart from the larger than expected $600 billion in purchases of Treasury paper, the Fed is also planning to reinvest some $250-300 billion in interest and principal repayments, which will bring the QE total to $850-900 billion over the term of the program. We for now conclude our comments on the Fed ends with a brief reminder about Mr. Bernanke's WSJ article today, where he defended his choices by referencing the success of the U.S. economy in avoiding the collapse feared by many after the Lehman event. That he has smoothened the curve is certain, but whether the total pain and cost of the turmoil has really been diminished, in its full scope and duration, is an altogether different matter. We were surprised to see the Chairman admitting in the article that QE has had little effect on money supply. Yet the Chairman, and his esteemed colleague Paul Krugman have often focused on the collapse in money supply after the 1929 crash, and how the failure of the Federal Reserve back then to prevent it later caused to the Great Depression. And so we wonder what exactly has been achieved by pumping money, if expansion of the money supply was not the result. The tightening of various credit spreads, and the greater availability of liquidity are the obvious answers, but if we assume that the economy is facing a demand shock, the significance of these improvements is highly debatable. In any case, since Ben Bernanke is explicitly aiming to bring inflation higher this time, he is implicitly admitting that the first leg of QE was ineffective in preventing disinflation/deflation at the very least.

To proceed with the day's other developments...

Ireland's CDS break new records, ECB reported intervening

Irish CDS has been widening non-stop today reaching 600 bps after breaching 500 this week. The spreads of Portugal's 10 yr-debt vs. the German bund of similar maturity is now quoted at 400 bps, while the Irish 10-yr spread against the same is 500 bps today. While it is clear that the Germans and the ECB will not let these nations fail just yet, the future is becoming blurrier every time Chancellor Merkel comments on the need to "share the pain", which unnerves buyers that the high yield game may prove to be too costly in the end. Meanwhile, the ECB was seen buying Irish bonds, yet the amount was apparently too small to make any impact.

Against all these, 3-month Euribor was higher by 1 bp at 1.050% vs. yesterday's 1.049. Right now we have 3-month Euribor about 50 bp higher than the target rate, while in pre-crisis years this would be around 25 points at most.

Turkey, Bulgaria say US policy may be a mistake, Malaysia, Japan, China voice concern over the dollar

It is rare to see Turkey complain about the fall of the USD, since the country has been benefiting massively from hot money/carry trade flows over the years, yet the FM today was reported as commenting that the Fed's new moves may "do more harm than good" as they raise "serious question marks about the dollar". In similar comments, Bulgaria's Finance Minister Simeon Djankov, a former World Bank economist, was stating in an interview with the DJ Newwswires that the move is likely to backfire in an interview, adding that the risks are probably greater than the potential benefit of the course taken.

In Asia, FX action was frantic today. As USDJPY fell to near 80.50 once again, FM Noda repeated yesterday's comments about being ready to take decisive action which nobody seems to take very seriously. Bank of Thailand was reported to have bought at least $100 million guarding the 29.70 level against speculators determined to bring the USDTHB rate lower. Similarly, the Bank of Philippines was believed to be intervening around the 42.50 level, while the central bank Governor Amando Tetangco was voicing his hopes that the clarity about the Fed's course of action should reduce the bearish sentiment against the dollar. Filipinos with relatives working overseas and receiving wages in the USD are thought to be worried about diminishing incomes as remittances of overseas workers depreciate with the USDPHP.

Malaysia's central bank Governor, Zeti Akhtar Aziz was quoted as saying that central banks in the region are "vigilant and in close regular contact" in monitoring capital flows, and are willing to "act collectively" in order to ensure regional stability. His comments came around the same time as Li Deshui, an oft-quoted advisor to the PBOC stated that China could cooperate with other nations to stem the rapid depreciation of the USD. In some sharply worded statements, he added that yuan rise will not solve the U.S. economic problems and will not improve the current account situation of China, adding that American demands about the currency arise from a "true intention to restrict China's economic development". In spite of this general attitude from the Chinese side, the yuan was fixed higher at 6.6708 vs. 6.6818 yesterday, in line with the rises in other Asian nations.

We also had comments by the current head of the HKMA, after the former Chief Executive spoke about the perils of American policy yesterday. In comments, Norman Chan was saying that they will continue to "monitor the situation, and could adopt measures to ensure that banks strengthen risk management policies", drawing attention to the possibility that a property bubble will develop in HK.

The exception to this picture was Vietnam, which has been having a string of difficulties since 2008, with the central bank selling dollars to counter surging demand from firms and consumers worried about inflation approaching double digits this year. The country is reported to possess reserves worth 6-7 months of imports, with a current account deficit of $12 billion.

Eurozone Services PMI shower a widening gap between the core and the periphery

Italy PMI came lower than expected at 51.0 vs. 51.3 previously, while Spain's numbers disappointed by 1.4 points, coming at 46.5 vs. previous 47.9. The reader can contrast these numbers to Germany's 56.6, and the Eurozone's overall 53.8, which actually came better than expected but failed to lift up the Euro considerably. Our conviction that the raw numbers mean little, with the gaps mattering most for the future of the Eurozone should by now be shared by our readers. It is very hard to agree that an economy contracting at 46.5 and one surging at 56.6 in PMI terms can be made subject to the same monetary policy productively. The periphery is desperately in need of devaluation, yet it gets appreciation at the moment as the ECB maintains its hawkish stance. We expect the deterioration to worsen over the next few months.

Today was a day full of contradictions, and both the bear and the bull had something to take from it to bolster his argument. But we wonder how favorable the outlook can be when among many other assets gold is frequently the winner. Nobody can purchase anything with the metal, and unlike with paper money, people do not lend with their gold hoard, so it is hard to interpret its relentless rise as anything other than a vote of no confidence in the world of governance and finance on a global scale.