US and them: markets reel as Fed tapers another $10bn

Currencies in emerging economies have taken another battering after the US Fed trimmed its asset-buying programme by another $10bn.

by Emma Haslett
Last Updated: 04 Feb 2014

Shock, horror: as his final act in office yesterday, US Fed chairman Ben Bernanke cut the country’s quantitative easing programme by a further $10bn, which means it’ll now be buying about $65bn US Treasuries and mortgage-backed securities a month, down from the $85bn it maintained through most of 2013.

This was by no means a surprise move: for one thing, Bernanke has been hinting at tapering since last May. For another, the Fed shaved the first $10bn off its asset-buying programme last month.  

But markets still reacted for all the world as if they had no idea this was going to happen. The FTSE 100 opened at 6,532 this morning, 12 points below last night’s close, while the S&P 500 finished Wednesday’s session at its worst level since mid-November. Overnight, Tokyo’s Nikkei 225 dropped 2.5% (although that was exacerbated by worries about China’s manufacturing sector, which contracted for the first time in six months in January).

The outlook for currencies in emerging economies stayed uncertain. Particularly those in Turkey and South Africa, which have been under pressure lately anyway: having rallied slightly after its central bank hiked interest rates, the lira dropped by almost 2% after the Fed’s announcement.

Japan’s economy minister, Akira Amari, put it concisely: ‘[Equities markets] are widely affected by problems surrounding the US’s exit strategy from quantitative easing. But the US is confident that the US economy is in a good enough condition to go ahead with the reduction of QE. So the market should take a more dispassionate view.’

The strange thing is that when the Fed began this tapering malarkey, markets actually reacted rather favourably: the S&P 500, for instance, rallied 1.7% - one of its best days of the year. That was essentially because the dreaded taper hadn’t ended up being quite as harsh as everyone had expected. In the grand scheme of things, $10bn seemed like peanuts.

But the fact that the Fed has followed up with another cut so quickly seems to have shaken investors’ confidence.

‘The reality of the taper is finally starting to sink in,’ Scott Anderson, chief economist for Bank of the West, told Businessweek. ‘I think the Fed surprised people today.’

Perhaps it was just Bernanke – who hands over the reins of the Fed Janet Yellen tomorrow – wanting to pack a punch before he bows out. Whether emerging economies can endure another month of US tapering is now a matter for his successor.

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