22-Sep (The Economist) — BUY on the rumour, sell on the news. It is an old market adage that may explain why the the equity market has sold off so sharply in the wake of the Fed’s announcement of Operation Twist. But the scale of the sell-off (the FTSE 100 is off nearly 5% as I write and below the 5,000 mark, while the Dax is off more than 4%) suggests that something else is at work.

Perhaps the Fed’s downbeat assessment of the economy was to blame? That is possible and the mood will not have been helped by today’s European purchasing manager indices, which are below 50 on the composite measures (and around 50 in Germany), a level that indicates declining activity.

…That would suggest that, like Oliver Twist, the markets were hoping for something more, a commitment to (or at least a hint of) full-blown QE, in defiance of the Republican leadership.

…Broadly speaking, then, one can say that market reaction to the Fed shows either the fear that the central bank is running out of ammunition (at a time when fiscal policy is also constrained) or that the Fed will simply have to act more decisively (just as many believe the ECB will eventually have to buy a lot more Italian and Spanish bonds).

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