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.

Will rupee slide speed up FII selling of Indian shares?

Santosh Nair, Riken Mehta
Moneycontrol.com

Finance minister P Chidambaram Thursday tried to pacify jittery markets, saying foreign capital flows were strong enough to bridge the current account deficit. But will the flows sustain going forward?

Theoretically, a weak rupee provokes foreign funds into selling Indian equities, as it would lower their portfolio value, if the stocks have not been performing.

Assume a foreign fund buys one share of a company for Rs 52 when the rupee was 52 to the dollar. If the stock price remains constant, and the rupee depreciates to 57 to the dollar, the value of the portfolio is now less than 1 dollar. But if the stock had risen to Rs 62, the foreign fund would not be worried, since the appreciation could more than cover up for the weakness in the rupee.

India is among the emerging market countries which have gained from the low interest rate policies of the US Federal Reserve and the European Central Bank. Generous dollops of liquidity resulting from those policies found their way into Indian shares, keeping share prices higher even during periods of weakness in the rupee.

But now market is not so sure if the liquidity flows will sustain, as there are doubts that the Fed may now start cutting back on its monetary stimulus.

Since the big sell off in global markets a couple of weeks back on these concerns, foreign fund flows into India have slowed.

And there is bad news on the debt front as well. FIIs have net sold close to Rs 4000 crore of Indian debt as bond yields are softening in anticipation of a decline in interest rates.

If capital flows slow down at this stage, this could trigger a vicious cycle of weakening rupee and foreign fund outflows. 

June seasonality: How BSE Sensex has moved in past 20 years

Riken Mehta
Moneycontrol.com

Traditionally, May has not been the best of month for equity investors, with the market declining more often than it has risen. But June seems to be the exact opposite. In last 20 years, the BSE Sensex has risen 14 times in June. This could partly be due to the pessimism in May, and the subsequent covering of short positions. But things don't look too bright for Indian equities this June.

The HSBC Manufacturing Purchasing Managers' Index (PMI) for May declined for the third successive month to hit a 50-month low of 50.1, and the widely held view is that economic recovery could be slower than what was expected.

The rupee is under pressure, political uncertainty looks likely to persist, and there are questions about the continuation of US Federal Reserve’s loose monetary policy, which has been driving the rally in emerging market equities.