Has Yellen & Co just rocked the boat in buoyant stock markets? Find out here
NEW DELHI: US stocks reversed gains and ended lower in Wednesday’s trade. Markets across Japan, Hong Kong and Taiwan tumbled up to 1.5 per cent on Thursday morning.
Dalal Street too opened in the red despite expectations of a status quo on policy rate by the Reserve Bank of India in its policy review later in the day.
So, does it mark a U-turn in the global stocks rally? What’s the trigger for this?
This from the minutes of the US Federal Open Market Committee’s last policy review may help.
“In their discussions, policymakers reaffirmed the approach to balance sheet normalisation articulated in the Committee’s policy normalisation principles and plans announced in September 2014. In particular, participants agreed that reductions in the Federal Reserve’s securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings.”
The US Fed quadrupled its balance sheet post the 2008 financial crisis to roughly around $4.5 trillion in its bid to raise investments and generate jobs.
And the minutes of Fed March 14–15 policy review released overnight signalled that Yellen & Co are now readying to drastically trim this balance sheet.
Now read this: “Most participants expressed the view that changes in the target range for the federal funds rate should be the primary means for adjusting the stance of monetary policy when the federal funds rate was above its effective lower bound.”
All through nearly past decade, a swelling Fed balance sheet propped up the US economy. It also anchored the roughly decade-long rally in emerging markets stocks. Thanks to strong growth that India has been seeing all these years, the Sensex now stands at 30,000 compared with the sub-8,000 level that it had quoted at in early March of 2009.
More than Fed rate hikes, the move to shrink the Fed balance sheet is seen as a bigger negative for financial markets.
In a note to clients, HDFC Securities noted that the Fed would need to sell bonds that it had purchased, which means the likely supply would cause bond prices to fall, sending yields higher.
In addition, the development may cause the dollar to strengthen, as the Fed reduces the volume of currency in circulation. These events could be a negative for emerging markets.
“We believe the Fed’s talk of a balance sheet contraction, even before all the planned hikes have gone through this year, will bring the markets down to terra firma, rather than any genuine desire to do so at this juncture,” said V K Sharma, Head of Private Client Group, HDFC securities.
“While there could be many a proverbial slip between the Fed’s cup and the lip, this one could seriously dent the global sentiment, especially when President Donald Trump has still not unveiled the much-awaited policy measures to boost the economy and state spending on infrastructure,” Sharma said.
The Fed minutes, meanwhile, also raised concern over equity valuations.
“We all take what central banks say about equity markets with a grain of salt; their job is to focus on the fundamental performance of the economy and remove accommodation that is no longer needed. The market was taken aback by the minutes. I do not know why they would be, because we have been talking about the possibility of the Fed starting to wind down its balance sheet sometime later this year or next year and still see radical issues with the Fed, they are speaking about doing the various options,” said James Classman, JPMorgan Chase & Co.
Dalal Street too opened in the red despite expectations of a status quo on policy rate by the Reserve Bank of India in its policy review later in the day.
So, does it mark a U-turn in the global stocks rally? What’s the trigger for this?
This from the minutes of the US Federal Open Market Committee’s last policy review may help.
“In their discussions, policymakers reaffirmed the approach to balance sheet normalisation articulated in the Committee’s policy normalisation principles and plans announced in September 2014. In particular, participants agreed that reductions in the Federal Reserve’s securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings.”
The US Fed quadrupled its balance sheet post the 2008 financial crisis to roughly around $4.5 trillion in its bid to raise investments and generate jobs.
And the minutes of Fed March 14–15 policy review released overnight signalled that Yellen & Co are now readying to drastically trim this balance sheet.
Now read this: “Most participants expressed the view that changes in the target range for the federal funds rate should be the primary means for adjusting the stance of monetary policy when the federal funds rate was above its effective lower bound.”
All through nearly past decade, a swelling Fed balance sheet propped up the US economy. It also anchored the roughly decade-long rally in emerging markets stocks. Thanks to strong growth that India has been seeing all these years, the Sensex now stands at 30,000 compared with the sub-8,000 level that it had quoted at in early March of 2009.
More than Fed rate hikes, the move to shrink the Fed balance sheet is seen as a bigger negative for financial markets.
In a note to clients, HDFC Securities noted that the Fed would need to sell bonds that it had purchased, which means the likely supply would cause bond prices to fall, sending yields higher.
In addition, the development may cause the dollar to strengthen, as the Fed reduces the volume of currency in circulation. These events could be a negative for emerging markets.
“We believe the Fed’s talk of a balance sheet contraction, even before all the planned hikes have gone through this year, will bring the markets down to terra firma, rather than any genuine desire to do so at this juncture,” said V K Sharma, Head of Private Client Group, HDFC securities.
“While there could be many a proverbial slip between the Fed’s cup and the lip, this one could seriously dent the global sentiment, especially when President Donald Trump has still not unveiled the much-awaited policy measures to boost the economy and state spending on infrastructure,” Sharma said.
The Fed minutes, meanwhile, also raised concern over equity valuations.
“We all take what central banks say about equity markets with a grain of salt; their job is to focus on the fundamental performance of the economy and remove accommodation that is no longer needed. The market was taken aback by the minutes. I do not know why they would be, because we have been talking about the possibility of the Fed starting to wind down its balance sheet sometime later this year or next year and still see radical issues with the Fed, they are speaking about doing the various options,” said James Classman, JPMorgan Chase & Co.
