20th June 2013
This isn’t quite what markets had been expected. The Federal Reserve says it will begin tapering quantitative easing by the end of this year as Reuters reports. Previous remarks from Ben Bernanke in which he merely suggested the possibility of tapering caused stress in both equities and bond markets, so an actual concrete announcement was certain to cause markets to fall. Asian stocks saw the biggest fall since late 2011.
At least one thing that the market jitters have done is demonstrate that there will be quite a period of nasty adjustment for the global economy. Some markets especially emerging markets and especially emerging markets with current account deficits may be vulnerable to further falls as the US stops keeping rates artificially low and money stops being easy.
It is interesting however that shares, bonds and commodities are all falling. At some stage, of course, equities should return to a better trajectory. That is what an improving economy is meant to signal.
The mood was soured further by falling manufacturing activity in China, explaining the falling commodities in particular.
Yet some optimists believe that after the adjustment, the bull will be back in charge. They expect the next phase of any rally to be led more by cyclical stocks rather than an untypical defensives-led rally which clearly had concerns about bonds at its heart. The era of QE has altered a lot of thinking.
Of course, some analysts had expressed the hope that Fed Chairman Ben Bernanke would have been a little fuzzier in terms of his message this time out and it presents a very interesting welcome present to incoming Governor of the Bank of England Mark Carney. But we wonder if, in a few months time, Bernanke may be viewed as having played a difficult hand rather well. First we were introduced to tapering as a term, which surely signalled his intentions and caused some adjustment, then he expressed him firm intentions to change course. But it is a taper. It is not a cliff-edge or anything like it, even though markets may be behaving as it is. And after all QE cannot last for ever.
For a look at what the experts are saying, here, hot off the fax machine, is Schroders chief economist Keith Wade.
He says: ”
“It should be good news, but markets have sold off following comments from Federal Reserve chairman (Fed) Ben Bernanke that he expects the Fed will end Quantitative Easing (QE) next year. As a result, tapering of purchases is now likely to begin later this year.
“The Fed is responding to signs that the US economy is improving and they have revised up its forecasts for growth in 2014. Unemployment is now expected to fall more rapidly, reaching a 6.5% to 6.8% range by the end of next year. Asset purchases are likely to end with “the unemployment rate in the vicinity of 7% with solid economic growth supporting further job gains” said the Fed chairman. On the Fed projections this would be by the middle of next year.
“The outlook is still data dependent, but as a consequence of these comments we are bringing forward our expectation of Fed tapering to start at the December 17/18 meeting (previously q2 2014). Data would have to be quite robust for a move in September this year, which seems unlikely given that the full impact of fiscal tightening has yet to be felt in the US and the global economy remains soft (judging from today’s flash PMI’s for China and Germany). Inflation is also expected to remain low (although the Fed acknowledged this in its forecasts).
“These moves offer a roadmap for the exit from QE and so provide some clarity to the markets. Strong growth would now be seen as bad news by bringing forward tapering, but the Fed will be aware that significant increases in bond yields will hit the recovery through higher mortgage rates. Weaker equity markets could also slow activity by reversing wealth effects. On the positive side investors should have increased confidence in recovery, but the immediate focus will be on the unwinding of liquidity trades.”