Daily Market Reports | Jun 20 2013
By Greg Peel
The Dow fell 206 points, or 1.4%, while the S&P dropped 1.4% to 1628 and the Nasdaq lost 1.1%.
“The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year”.
Thank you Uncle Ben. At last we know. Mind you, it was only in the press conference that the Fed, through its chairman, outlined the specific timetable above. The Fed will begin to taper its purchases of Treasuries and mortgage-backed securities from the US$85bn per month level beginning later this year, and end QE purchases for good in around a year’s time, assuming the US economy continues to recover as the central bank anticipates.
The official FOMC statement, released prior to the conference, made no mention of timing, rather maintaining the line that “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes”.
Had there been no scheduled press conference, we would still be in the dark. There was very little change in the statement from prior statements, other than to suggest “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall [northern autumn]”. This slightly more hawkish comment would have heightened taper anticipation if Bernanke had not then clarified the position before the press. When asked why the press conference had been chosen as the forum to set the world straight, rather than the official channel of the FOMC statement, Bernanke rightly suggested that the committee wanted to emphasise the point that nothing in the policy had changed.
And that’s the salient point. Through all the volatility on Wall Street and global markets since April, all the ups and downs, rumours and arguments, the Fed has not changed its policy. The timing outlined above is still very much dependent on the US economy progressing towards the Fed’s targets of 6.5% unemployment and no more than 2.5% inflation. If the recovery stalls, the timing shifts further out.
If all goes well, the Fed will look to make its first funds rate hike in 2015. The tapering, exit, and rate increase will all be “measured”, suggesting baby steps. Bear in mind also that if the Fed stops buying assets, it doesn’t imply the Fed will sell assets. The Fed will likely just allow its overblown balance sheet to reduce over time as assets on the books mature. In that sense there would be no QE “exit” next year but rather a QE halt. As to when the taper commences, the market is already arguing September or December. Clearly the jobs numbers from here on will be important in who proves right.
It is not “normal” for stock markets and bond markets to fall in unison, but then direct central bank intervention in money markets is not “normal”. The S&P dropped on the statement release, stabilised ahead of the press conference, then plunged. US ten-year bonds mimicked stocks, with the yield ultimately rising a whopping 26 basis points to 2.34%. The interesting point, nevertheless, is that Bernanke really didn’t surprise anyone. Wall Street’s rallies of the past couple of sessions suggested no immediate tapering was expected, but ultimately consensus had the Fed beginning to act in the time frame now suggested.
It is of little surprise the stock and bond markets made the initial moves they did. Post-GFC history shows that the smart money tends to stay right out of the markets in the two hours left of the trading day following Fed statements. The smart money lets the knee-jerk reactors and panic merchants (and not so cerebral computers) get it out of their systems before taking the Fed Statement to bed and having a sleep on it. Often the following day’s session offers up a turnaround. We can only wait to see. One thing we do know is that there are those declaring the end of the world to be nigh if Fed support is withdrawn. Two hundred Dow points is not the end of the world.
Market movements elsewhere were also predictable. The US dollar index rose 0.8% to 81.30 and gold fell US$17.90 to US$1350.60/oz. The Aussie copped a hiding, plunging two cents to US$0.9296.
The LME had closed before the Fed statement was issued so we will need to wait to tonight to gauge the reaction. Moves last night were inconsequential but for lead, which fell 1.8%. West Texas crude played to script in falling US71c to US$97.73/bbl, while Brent crude rose US10c to US$106.12/bbl.
Spot iron ore, which cares not about such trivial matters as US monetary policy, jumped US$2.30 yesterday to return to the more comfortable US$120.00/t mark.
The SPI Overnight fell 55 points or 1.1%.
Tonight’s session on Wall Street will provide a better handle on the true response to the tapering announcement. Thereafter we should be able to expect an easing off in the volatility we’ve experienced this past month, but first we have to get through the quadruple witching expiry of futures and derivatives on Friday night, which alone can encourage volatility.
On that note, today sees the expiry of ASX index options and June SPI futures expire at the open tomorrow. Pity the poor options market makers who are short volatility on the day after such a fundamental Fed meeting. Things might just fly around towards the close today, and then to top it off, the ASX indices will rebalance tomorrow, with several promotions and relegations of stocks in and out of the 200 and other indices. More fun.
Maybe the dust might settle next week.
HSBC China flash PMI out today as well, and Rudi will appear on Sky Business today at noon.
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