Taper off = Risk on.

19th September 2013

Ian Copelin, Investment Director, my wealth, comments “As suggested in my post on Monday (16 September), the US Federal Reserve did surprise the markets yesterday. The Federal Open Market Committee (FOMC) announced after its two-day meeting that it wants to see more evidence that US economic progress will be sustained before adjusting the pace of its $85bn monthly bond buying programme.

Although it shouldn’t have been a surprise (as the decision clearly follows its stated policy of continuing to increase monetary stimulus while the US labour market remains above 6.5% and inflation below its 2.5% target – see the market update dated 26 June), it sent US indices immediately higher as market participants had been expecting a taper of around $10bn (leaving QE at $75bn per month).

The FOMC added, “The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement”. This is a clear reference to the 100 basis point increase in the 10-year US Treasury yield since May, which is already negatively impacting the housing market recovery.

Having been down a couple of points (0.25%) before the announcement, the S&P 500 suddenly rebounded and ended the day up 20.76 points or 1.22% – a new record high of 1,725.52. It was a similar story for the Dow Jones: having been down around 50 points (0.32%) before the announcement, the index immediately climbed to end the day up 147 points or 0.95% – also a new record high. Elsewhere the 10-year US Treasury yield fell from 2.87% to 2.68%.

The Fed’s decision is very supportive for global equities. However, the main and immediate beneficiaries were the emerging market indices. These markets have been pummelled since May as investors reallocated investments from emerging markets to developed markets due to concerns that the Fed would taper its stimulus – consequently, overnight large rises were seen in Thailand, Indonesia, the Philippines, India and Turkey.

The FTSE-100 is currently up 93 points at 6,652 while the yield on the benchmark 10 year gilt is down 15 basis points to 2.85%.”