By BLOOMBERG
Asian equities and US stock futures slid after Federal Reserve chairman Ben S Bernanke said bond purchases may be reduced should the economy continue to improve. Crude oil sank a second day and metals from copper to gold retreated while Malaysia’s ringgit tumbled.
The MSCI Asia Pacific Index of regional shares slipped 1.9% by 10:18am in Tokyo, as Japan’s Topix Index fell 0.5%. Australia’s S&P/ASX 200 Index lost 1.2% and the Kospi Index in South Korea sank 1%. Futures on the Standard & Poor’s 500 Index, which declined 1.4% in New York, slid 0.3%. The ringgit sank the most since November 2011 and the Koren won lost 1.1%. Silver, platinum and palladium slumped, as crude lost 0.8%.
Stocks and commodities declined after Bernanke said the Fed may start reducing bond purchases that have fueled gains in markets globally, and end the program known as quantitative easing in 2014 should risks to the US economy abate. Economists surveyed by Bloomberg predict data today will show improvement in US manufacturing and the housing market. The US jobless rate will fall to between 6.5% and 6.8% by the end of next year, Fed officials said yesterday.
“The Fed wasn’t as dovish as people expected and while that’s a good thing in terms of what it says about the US economy the market will focus on the timeline given for the tapering,” Bevan Graham, chief economist in New Zealand at AMP Capital Investors Ltd, said by phone in Wellington. “The tapering of quantitative easing is just an end to the easing phase, we’re a long way off from tightening.”
Market volatility
Ben Bernanke
Speculation that the Fed will begin withdrawing its stimulus measures has boosted trading in an exchange-traded note tracking US volatility. The iPath S&P 500 VIX Short-Term Futures ETN was the third most-active ETF in the US yesterday, with 86.7 million shares changing hands, according to data compiled by Bloomberg. While the Nikkei 225 Stock Average Volatility Index fell 5% today, a similar measure for Hong Kong’s Hang Seng Index jumped 6.3%.
The ringgit weakened 1.5% to 3.1993 per dollar, the biggest intraday decline since Nov 1, 2011. The Dollar Index, a gauge of the US currency against six major peers, was little changed at 81.44, after jumping 1% yesterday.
New Zealand’s dollar traded 0.3% lower at 78.71 US cents, falling for a fifth day, after government data showed expansion in the South Pacific nation’s economy slowed to 0.3% in the first quarter, less growth than economists had estimated.
‘Moderate the pace’
The pace of Fed bond purchases, currently at US$85 billion a month, will be influenced by economic data, Bernanke said.
“The committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year” if economic data are broadly consistent with the Fed’s forecast, Bernanke said at a press conference in Washington. “And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”
The Federal Open Market Committee also said in its statement yesterday that policy makers anticipate that inflation over the medium term will probably run at or below its 2% objective.
US central bankers in December linked changes in benchmark borrowing costs to the outlook for employment and prices. The FOMC said the rate will remain in a range of zero to 0.25% so long as unemployment remains above 6.5% and the outlook for inflation is no higher than 2.5%. The nation’s jobless rate in May was 7.6%.
Chinese PMI
Yields on 10-year Treasury notes jumped 17 basis points to 2.36% in New York, the highest level since March last year.
Futures on Hong Kong’s Hang Seng gauge added 0.2%, while contracts due this month on the Hang Seng China Enterprises Index of mainland Chinese stocks traded in the city climbed 0.3%. Chinese manufacturing probably contracted in June, with economists predicting a reading of 49.1 in the HSBC Holdings Plc and Markit Economics Ltd PMI due today, from 49.2 in May.
The MSCI Asia Pacific gauge has regained 1 percent from an almost six-month low reached June 13 after the Bank of Japan added to concern over reductions in global stimulus by leaving its lending program unaltered.
Fueled gains
The Fed’s record-low interest rates and bond purchases have helped fuel a rally in stocks that has lifted the S&P 500 as much as 147% from its bear-market low in 2009. The MSCI Asia Pacific measure has climbed 29% in the past four years.
“A lot has been predicated on their assessment of the economy, and the assessment is that the economy is improving,” Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc, which oversees more than US$1 trillion of assets, said by phone yesterday. “The search for yield has forced investors into esoteric parts of the market. Just the hint that the Fed is going to start scaling back puts these positions at risk.”
Crude oil extended yesterday’s 0.2% drop, declining to US$97.48 a barrel. Gold futures due in August lost 2.1% to US$1,345 an ounce, set for the biggest one-day decline since June 7. Copper futures retreated 0.7%, falling a third day, while silver slid 0.6%. Platinum prices lost 0.4% and palladium declined 0.7%.
Suppressed rates
The quantitative easing program suppressed interest rates, with the yield on the 10-year Treasury note reaching a record low of 1.39% in July and remaining below the S&P 500’s dividend yield for most of 2012 and 2013. The benchmark note’s average rate over the past year has been 1.78%, compared with an average of more than 6.5% in data compiled by Bloomberg starting in 1962.
The S&P 500 reached a record 1,669.16 May 21, the day before Bernanke told Congress the central bank could begin to reduce the pace of asset purchases should the job market shows signs of sustainable improvement The benchmark gauge has slumped 2.4% since then. Ten-year Treasury yields topped 2% that day for the first time since March.
The Fed will probably wait to taper bond buying until its Oct. 29-30 meeting, when it will cut its monthly purchases to US$65 billion, according to the median estimate in a June 4-5 Bloomberg survey of 59 economists. By then, inflation will be rising toward the Fed’s target, accelerating to 1.3% in the third quarter and 1.5% in the fourth quarter, according to economists’ projections.
‘Somewhat opaque’
“The market has been looking for clarity and the Fed simply can’t give it to them,” Malcolm Polley, who manages US$1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said by phone. “As relatively more clear as Bernanke tries to be, the Fed is still somewhat opaque in what they say. They can’t come out and say ’We are going to start raising rates on this day.’ They have to be guarded in how state it.”
While the end of Fed stimulus has preceded stock gains over the past two decades, those rallies usually followed periods of market weakness. The S&P 500’s 87% advance since the rate on overnight loans between banks was pushed to zero in December 2008 is more than five times the average advance in periods following monetary easing, data compiled by Bloomberg show.
The MSCI Emerging Markets Index fell for a third day, sliding 0.6% to the lowest level since July.
Investors have been pulling money from developing markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil. More than $19 billion left funds investing in emerging-market assets in the three weeks to June 12, the most since 2011, according to EPFR Global.
The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the US fell 2.5% in New York to the lowest level since August.
— by Emma O’Brien
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