How major stock markets react to news of Fed's taper talk

Riken Mehta 
moneycontrol.com 

Follow me on Twitter @mehtariken 
 
The US Federal Reserve has been the biggest spoilsport for bulls this calendar, repeatedly catching them off-guard with its comments on reducing the size of its monthly USD 85 billion bond purchases, also known as quantitative easing (QE). In theory, the bond purchases were meant to revive growth in the US economy by encouraging consumption and investment through easy money. In practice, huge dollops of those funds found their way equities and bonds in other countries, boosting their valuations. With a prospect of less global liquidity looming, investors are worried if the valuations can sustain.

A look at the timeline of the taper remarks and how key markets reacted to those.

Dates	Dow	Hang Seng	Nikkei	Shanghai
22-May	15307 (dn 0.5%)	22669 (dn 2.5%)	14483 (dn 7.3%)	2275 (dn 1.1%)
19-Jun	15112 (dn 1.3%)	20382 (dn 2.87%)	13014 (dn 1.74%)	2084 (dn 2.7%)
18-Sep	15676 (up 0.94%)	23502 (up 1.66%)	14766 (up 1.8%)	2221 (up 1.36%)
20-Nov	15900 (dn 0.41%)	23580 (dn 0.5%)	15365 (up 1.92%)	2205.77 (dn 0.04%)

May 22, 2013: Bernanke tells Congress Fed may reduce size of month bond purchases (QE) June 19, 2013: Bernanke says Fed will begin QE taper late 2013 and end it by mid 2014 if economy revives September 18, 2013: Fed says economy not strong enough, will continue with QE November 20, 2013: FOMC minutes suggest that taper will begin shortly.

Barring Dow, all markets reacted to Bernanke comments on the next trading day. So values are of the next trading day.

Nifty

May 22 2013: Nifty closed at 5967, lost 127 pts in next trading session post Bernanke comments. Rupee was at 55.585, depreciated 0.2%.

Between May 22 and June 19, Nifty made a low of 5683 while Rupee depreciated 5.8% in the same period.

June 19 2013: Nifty closed at 5655, lost 167 pts or 2.86% in next trading session post Bernanke hinting at QE tapering in next meet. Rupee closed at 59.575, depreciated 1.46%. Between June 19 and Sep 18, Nifty made a low of 5118 (down 16% since Fed first mentioned tapering of QE on May 22), while rupee depreciated to 68.84 (rupee lost 24%) on account of heavy unwinding by FIIs.

Between May 22 and Sep 18, FIIs sold equities worth close to Rs 11500 crore.

September 18 2013: Nifty closed at 6115, gained 216 pts or 3.6% post Fed deciding not to taper QE. Rupee was at 61.775, appreciated 2.54%. Between September 18 and Nov 20, Nifty made a high of 6342, rupee appreciated to 61.01 on account of continuous buying by FIIs. FIIs bought equities worth close to Rs 28800 crore in the same period.

November 20, 2013: Nifty closed at 5999, lost 120 pts or 2% post fears of tapering.

Goldman Sachs expects Federal Reserve to taper QE in September 2013

Riken Mehta

Brokerage house Goldman Sachs expects the Federal Reserve to taper its quantitative easing programme in its FOMC meeting scheduled in September. On the back of stronger June payrolls growth, upward revisions to prior months job data and a larger-than-expected increase in earnings, the broking firm revised the FOMC's tapering call from December 2013 to September 2013.

"We expect that purchases may be reduced from the current rate of USD 85 billion per month to USD 65 billion per month, with most or all of the adjustment occurring through reduced Treasury purchases. We are not changing our call for the date of the first fed funds rate increase, which remains in Q1 2016, at which point we forecast an unemployment rate of 6.0%," said Goldman Sachs Research note to clients.

It added that the unemployment rate remained unchanged, but the employment-to-population ratio and labor force participation rate increased.

FIIs sold Rs 2136cr worth stocks on Jun 20; highest in 2yrs

Ritika Dange, Riken Mehta
moneycontrol.com

According to Securities and Exchange Board of India (Sebi), foreign instituitional investors (FIIs) offloaded about Rs 2136 crore worth equities on Thursday, highest since May 13, 2011 ( Rs 3706.4 crore).

Thursday saw the Sensex tank over 500 points, its steepest crash since February 27, 2012. What triggered this sharp fall was US Federal Reserve chairman Ben Bernanke’s decision to taper the country’s monetary stimulus program- the quantitative easing 3 (QE3).

Bernanke said the bond buying program, to the tune of USD 85 billion per month, will be slowed down over the coming months and will be brought to a complete halt by mid 2014.  Bernanke’s speech sent global markets in a frenzy seeing a fall in equities, commodities and currencies as investors panicked at the thought of a slowdown in foreign capital flows into the markets.

End to cheap liquidity

Most global markets were funded for long by cheap liquidity from various countries monetary stimulus programs- the United Kingdom’s long term refinancing operation (LTRO), the Unites States’ quantitative easing (QE) and Japan’s bond buying program. Banks across the globe used this liquidity to invest in various asset classes to earn quick returns rather than lending it to borrowers to kickstart the economy as expected by respective central banks.

Double whammy

Weak fundamentals, dismal earnings, high company debts and a prolonged political logjam deterred companies from posting positive returns for FIIs on their investments.

What came as a double whammy was the depreciating rupee that saw its all time low of 59.93 against the dollar- a figure far higher from the average dollar rate of 51.80 for the past two years (May 2011-May 2013). This translates into a 15 percent loss for the FIIs on currency conversion based on the current exchange rate of rupees 59 per dollar.

As a testimony to the weak sentiment prevailing among investors, FIIs pulled out capital worth Rs 1768 cr (provisional) from equities on Friday.

What led to massive fall in Indian rupee? Find out here

Riken Mehta 

The Indian rupee plunged to record lows on Monday, touching a level of 58.15 per dollar as the unwinding in currency carry trade is leading to the massive fall in the domestic currency.

Simply put, FIIs invested in Indian equities and debts earlier which were offering better returns compared to US 10 year bonds. However, the trade-off is becoming unviable for FIIs as the yield on these bonds have shot up significantly in the past one month on fears of Quantitative Easing (QE) or massive bond buying program coming to an end.

Back home, the Reserve Bank of India (RBI) is asking banks to cut interest rates that would lead to lower yields on deposits, reducing the arbitrage opportunities for foreign funds. If this situation continues for some more time, then one can expect massive unwinding in currency carry trades.

Last week, RBI has also pointed out that it will intervene in the forex market only to curb the volatility. Reading between the lines, the analysts believe that RBI will not try to suppress the rupee depreciation. In such a case, one cannot rule out the levels of 60/USD in the near future.