Financial markets were on consolidation mode yesterday, Investors were clearly disappointed by the Fed's inaction and the few changes in the monetary statement. Wall Street initially rose but retreated after the Fed meeting. The DJIA and the S&P 500 ended the day losing -0.30% and -0.66% respectively. In the commodity sector, crude oil prices gained as driven by the broad-based decline in US oil inventories. Gold retreated as the US dollar firmed after the Fed decided to pause this month.

The Fed disappointed the market as policymakers refrained from delivering any new measures to boost the deteriorating economy. The Fed continued to maintain that interest rates will maintain low at least until late 2014. While acknowledging the economic development have deteriorated the Fed chose a wait-and-see mode so as to gauge the impacts of the extension of operation twist. In the August statement, the Fed said that 'economic activity decelerated somewhat in the first half of this year', compared with 'economy has been expanding moderately' in the previous month. Moreover, the statement acknowledged 'further' signs of improvement in the housing sector, but maintained that the sector was 'depressed'.

Concerning further measures, the Fed pledged that it would 'closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery', while in the previous statement it said that it's 'prepared to take further action as appropriate to promote a stronger economic recovery'. The change indicated that policymakers have turned impatient with the pace of recovery in the job market. Therefore, the employment report due Friday would be an important indicator. If there's no/small improvement in payrolls from the second quarter of the year, the chance of further easing in the coming month would be greatly enhanced.

The next focus is on the ECB. Speculations of re-activation of bond purchases heightened after ECB President Mario Draghi said on July 26 that policymakers are ready "to do whatever it takes to preserve the euro". Yet, such hopes have tamed in recent days. For any bond purchase measures to be carried out by the ECB, we expect the central would prefer the EFST (and later the ESM) to intervene the primary market while it intervenes the secondary market. Moreover, it would prefer countries in need of money (e.g. Spain) to make request for the funding from EFSF first. Without this "pre-requisite" being done, the ECB is expected to remain on hold at the August meeting.