Tapering D Day – Is this the end of the QE sugar high?

18th December 2013

The Fed’s last meeting of 2013 ends today but market experts suggest that full tapering is very unlikely.

Abi Oladimeji, head of investment strategy, Thomas Miller Investment, says that tapering is more likely from mid 2014 and the year will be marked by a divergence in monetary policy stances of major central banks.

In a note issued today, he says: “The recent stream of better-than-expected headline economic data has once again shifted investors’ focus to the issue of Fed ‘tapering’. The concern now is that the Fed may start reducing its asset purchases (tapering) today.

“Clearly, the probability of Fed tapering increases with improvements in the real economy. However, we attach a low probability to tapering in December 2013. Why? The pace of US economic growth remains modest; fiscal uncertainty remains elevated; and imminent changes in the leadership and make-up of the Fed’s decision-making committee (FOMC) argue against significant policy shifts at this point.”

He adds: “We cannot rule it out entirely, but our base case is that the Fed would wait for further evidence of a broadening economic recovery before tapering. Specifically, if US economic activity plays out as expected, then the Fed is likely to announce a plan to begin winding down asset purchases around the middle of 2014.”

A rising tide may not lift all boats!

The note continues: “Recent market experience suggests that the announcement of Fed tapering is likely to result in a bout of volatility in financial markets. However, we believe that any correction in equity markets that is induced by tapering should be temporary. Consequently investors should view such a decline as an opportunity to add to long-term equity positions. It should be noted that this conclusion relies crucially on the assumption that the Fed will only taper in the context of a deepening economic recovery”.

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