Risk assets rally across global financial markets as liquidity junkie investors revel on the prospects of easy Federal Reserve cash sticking around longer than anticipated. Equities on the fly [US stocks recorded new highs, Asian markets celebrated too given that region is one of the biggest beneficiaries of loose Fed cash] commodities bounce with gold winning big, up 57 bucks, peripheral bond yields love the news and even core government bonds are celebrating. USD the standout loser as the Fed leaving the money printers on dilutes the currency’s strength.
Fed head Ben Bernanke threw out a surprise to many of us here at ETX Capital with his ready to taper-ready markets by not reducing the size of asset purchases the central bank buys under its bond-buying programme. After weeks of anticipation that the Fed indeed is likely to taper this month, with macro data supporting such action, investors were almost convinced that at least $10billion will be cut down from the $85billion currently purchased under the bond-buying programme.
Bernanke’s decision to hold back was on the back of concerns about the sharp spike in long-term interest rates following June’s announcement by the Fed that tapering could be around the corner. Indeed, the spike in US Treasury yields on the 10-year to 3% in the run up yesterday’s meeting also had the market fretting about the potential of rising rates choking the recovery in the play over in the US. Bond yields in the UK and Germany have also surged to levels we haven’t seen for over 2 years, reflecting the optimism in the global economic recovery.
Central banks however, feel that the sharp rises in longer-term interest rates at a time when the global economic recovery is tentative and fragile at beast, is unwarranted. Interestingly, the onus was not so much on the unemployment rate by Bernanke, but rather inflation – a deviation which many now feel knocks the credibility of the central bank. At times, it seemed like Bernanke was making up monetary policies on the fly, leaving some to believe the Fed president is just as clueless as the rest of us when it comes to placing the US on the path of sustainable growth.
So, when can we expect tapering by the Fed? Probably not until the end of the year. Bernanke had his chance to fire the first round but held back. His reasons appear to be valid; there’s going to be a big fiscal showdown in US Congress over the new budget to lift the debt ceiling. That said, Bernanke is on his way out with a new Fed president replacing him at the start of 2014. Given that market participants were prepared for tapering and that logically, it would have been sensible for Bernanke to start the taper ball rolling, I feel the Fed failed to seize on the opportunity to send the market a strong message by withdrawing its favourite drug. Risk sentiment may have got a nice kick up after the Fed meeting but the momentum behind this rally is certainly not credible, just like the Fed’s reputation at the moment.