World markets react sharply to Fed’s stance

Markets down in India, other Asian markets.

By American Bazaar Staff

NEW YORK: It is not just equity markets, the commodities markets, too, have reacted sharply to the U.S. Federal Reserve’s decision to slow bond buying program starting from this year end and close it by the middle of next year, once it feels that the economy is progressing as per its plan.

In the Asia-Pacific region, all the markets closed in the red. Japan’s Nikkei was down by 1.74 percent and China’s Shangai by 2.77 percent. Other indices in the region to record losses were Australia’s All Ordinaries (2.02 percent), India’s BSE Sensex (2.74 percent), Singapore’s Strait Times (2.51 percent) and Korea’s Kospi (2.0 percent).

Gold is also trading more than four percent lower, while oil in the commodities section was falling around 1.9 percent. The currency market, too, is facing significant challenges after the Fed’s comments on the gradual withdrawal of quantitative easing. While the Euro is trading around 0.7 percent weaker, Indian rupee hit a fresh low losing 2.2 percent. Similarly, currencies of Malaysia, Russia, and South Africa weakened by 1.7 percent, 1.9 percent and 2.9 percent respectively.

The Fed’s stance alone is not responsible for the massive sell off of various instruments in world markets. China’s factory growth hit a nine-month low, giving alarm bells to global investors of an impending slower growth in the world’s second biggest economy. However, it was the U.S. regulator that initiated the sell off mode globally.

While most of the currencies weakened, the U.S. dollar has strengthened. The recent rating upgrade from Standard & Poor’s to stable has also contributed to the strength in the greenback in the last two weeks. The rating agency’s comment that there is very limited risk of a downgrade threat in the next two years also boosted the investors’ sentiments towards the U.S. currency and the bonds.

The Fed move will hit the emerging markets very hard as the foreign institutional investors (FIIs) will continue to pull out from the markets. In the current month alone, FIIs have dumped bonds worth $4.7 billion in India in 18 straight sessions. They withdrew $5.6 billion from Brazil stock markets. According to Bloomberg, more than $19 billion in funds money has been moved out of these markets in the three weeks period ended June 12, the highest after 2011.

The emerging markets witnessed $3.9 trillion FIIs inflow during the last four years and the reversal could spell a gloom over the current account deficit of various nations as the domestic currencies are getting weaker.

The U.S. Fed and the European central bank’s potential move to slow down the easy money policy will increase the bond yields. Since December 2008, the United States has been witnessing near zero interest rates. Therefore, the emerging markets offered better yields for investors that allowed them to park their funds as the liquidity, too, was abundant. However, with the fluid situation continuing in many emerging markets, the FIIs are worried over the growth prospects since many international institutions have started cutting down their economic forecast under one pretext, or the other.

With the global economy still reeling from uncertainties, the emerging markets will be hard pressed to not only protect their currency from further weakening but also ensure that FIIs outflows are restricted.

The corporate sector is also likely to bear the brunt of the Fed move as it could suffer higher losses on unhedged foreign exchange exposure since the domestic currency is on a weak streak.

The only favorable point as a fall out of the Fed move is cooling off the prices of commodities such as gold and oil, which should somewhat cushion the current account deficit situation. However, there is a threat that in a country like India, any fall in gold price will be seen as buying opportunity, just as it happened in May.

Nonetheless, the Fed’s stance has undoubtedly alerted the global community to redraw their game plan for growth that is sustainable and achievable both in the short term as well as long term. It is time that various nations rework their strategies.

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