Markets are in negative territory and spectacularly so following a gloomy picture that was painted by Ben Bernanke last night. 

They got what they had expected from the Fed as they announced “operation twist”, but what they didn’t expect was a surprisingly bearish outlook for the world’s biggest economy.  Equity markets have been bombarded by bad news after bad news and this week looks to have been as bad as any so far.  Major banks across America and Europe have been downgraded on top of Italy’s downgrade a few days ago.  The focus has fully shifted back onto the banks again as concern augments about their exposure to sovereign debt.  On top of these, those Northern Rock type banks which relied so heavily on the money markets for funding are at risk of another credit crunch.  Calls for a mass recapitalisation of Europe’s banks are becoming greater which might help to stop the rot but will add further to the pressures on global economies, many of which are going to need a bout of austerity measures.

So the vicious circle goes on but it’s the ever increasing threat of another recession that is really spooking investors.  The Fed’s move to shift it's balance sheet around in order to bring down long term interest rates was being pooh-poohed even before they actually announced it as being a measure, that’s simply not going to go far enough to bring down unemployment in the US.

On top of all this more evidence that China’s booming economy is coming off the boil was indicated this morning after manufacturing data showed its third month of contraction.  We also get the European manufacturing PMI number this morning which is expected to fall and this follows a worse than expected number from Germany earlier, so things aren’t so pretty there either.

All in all the gloomy outlook doesn’t translate into a particularly bright outlook for equity markets.  The FTSE is down over three percent at the time of writing and much worse than where we were calling the market overnight.  Just above the 5100 area this is where the index bounced off a couple of weeks ago so support is seen around here, but a break below 5100/5075 could see a test of 5000 pretty quickly.

With the focus heavily on the FOMC meeting yesterday, the dollar was always going to be carefully monitored by traders.  After the Fed declaring their bearish stance, it encouraged traders to pile into the dollar.  It hit a two week high against the yen and managed to also reverse all its loses earlier gained by the euro.  It appears the bears are most definitely out for now and we could expect to see traders taking to the safe havens of the currency markets, which certainly include the dollar.  The euro is currently trading down against the dollar to 1.3550 which is at a week low. 

Gold’s support, provided by the weaker dollar, was nowhere to be seen yesterday as the yellow metal failed to gain any ground from the Federal Reserve announcement of the near to far $400 billion bond liquidity switch and in fact fell in tandem with equity markets.  It seems that traders are preferring to use the greenback as a safety haven in the short term and yesterday’s drop resulted in the precious metal falling below its 40 day moving average and at time of writing, the losses are being extended as the gold is trading at 1771.0.

The Department of Energy’s inventory numbers took hold of crude yesterday and gave it a boost after announcing a drawdown in stocks in excess of 7 million barrels.  This rally was later reversed after the FOMC stated they were selling out of their short term bonds and buying into longer term bonds.  This weighted crude and caused it to drop to recent lows, which this morning, hasn’t stopped, as the liquid commodity is trading down further at 108.21.