$0 — that is how much the Federal Reserve will buy in mortgage and treasury bonds next month. As widely anticipated the Federal Open Market Committee announced the end of its multi-year asset purchases Wednesday.In case you haven’t been watching, every month in 2013 the Federal Reserve purchased $85 billion worth of bonds, the peak of what was ultimately 37 months in a row of buying. The program, known as Quantitative Easing, was a key component of the central bank’s attempt to simulate job growth in an American economy that was still struggling to come back from 2008 recession.After months of speculation brought on a when the Fed Chairwoman Janet yellen will signal a tightening phase (Markets Pricing it in and out of and on) Now it happens as FED officially ended the Asset purchases yesterday and moving towards First rate hike cycle (Many are expecting it to happen around Q2 2015).The committee promised to keep a close eye on incoming economic data but told investors— barring significant changes to its outlook that the economy was moderately expanding — they should expect the same small measured cuts.[wp_ad_camp_5]
Prior to the meeting you would have hard pressed to find an investor who did not see this latest policy move coming, however, the initial market reaction to the FOMC statement was slightly stronger than many anticipated. Major indices were mixed in morning US-trading, with the Dow Jones Industrial Average and S&P 500 trading up but the Nasdaq Composite in negative territory. By the time however, all three were trading in the red, albeit the S&P and Dow down just about 0.2% versus the Nasdaq’s 0.7% slide. In the half hour following the release of the S&P was down 0.5% at 1,975 points. The Dow was down 0.4% at 16,939 points. And the Nasdaq was down 0.8% at 4,528 points. The 10-year Treasury note yield was up about 4 basis points prior to the announcement at 11.30 (IST) and maintained that level following the release.While most Fed watchers agree the statement is hawkish, they are not in agreement about what that means for rates.
What it means for Emerging markets including India?
FED leaves Emerging Markets exposed.For six years, emerging markets have lived in a world defined by the US Federal Reserve’s policies of easy money. Tides of liquidity have flowed from developed to developing economies, financing infrastructure and corporate investment and allowing consumers to indulge credit-fueled retail dreams.Thus, the Fed’s announcement on Wednesday that it would draw quantitative easing to an end represents both a watershed and upcoming trouble.The end of asset-purchases comes at a challenging time for emerging markets, beset by a confluence of adverse and interconnected trends. China’s economy is slowing,Brazil will see massive outflows,South Africa’s economic reports are somewhat muddy.Expect India where Modi premium is taking a toll on Investor’s confidence,BRC’s are in deep watershed issues
Sensex and MSCI EM Performance During QE Period
— Priyank Lakhia (@PriyankLakhia) October 30, 2014
Even without the Global downturn, monetary tightening by the US is a dangerous time for emerging markets.The unwinding of the US monetary stimulus has underpinned an appreciation by the US dollar (think about Exchange rates around mid 2013 where USD/INR jumped to 70),In the minds of many analysts, the future depends on what the Fed does next. If it moves swiftly to a more hawkish monetary policy, leading ultimately to a rise in US interest rates, the result for emerging markets could be stark.
But still hopes..
Nevertheless, even with all the negative signals, there are silver linings. Falling commodity prices are leading to ebbing inflationary pressures in much of the emerging world, giving central banks latitude to keep monetary policy loose. And while the Fed has drawn its asset purchases to an end, the Bank of Japan is still busy buying government bonds. The European Central Bank may follow suit if growth in the eurozone continues to disappoint. The era of abundant liquidity is by no means over.