It’s funny how seemingly innocuous words can suddenly take on a whole new meaning. Take tapering, for instance. Not so long ago, tapering was a word rarely heard outside of discussions about 90s hairstyling. Today it suddenly has enough power to send markets into a panic.
In the wake of Federal Reserve chairman Ben Bernanke’s use of the T-word to suggest a scale back of the Fed’s quantitative easing programme, bond yields have risen around the world and equities have sold off, as have commodities. Emerging markets have been particularly badly hit with equities, debt and currencies all falling.
It’s not just the markets which have been sent into panic about tapering; my inbox has suffered a similar fate, with everyone keen to comment on the possible implications of Bernanke’s plan. Depending on their asset class of choice, everyone has a different view on what the end of QE might mean.
So is the panic justified? It’s hard to say from this viewpoint. It could be argued there is some rationality behind the equity market’s response, as QE has created a benign environment in which governments and companies have enjoyed historically low borrowing costs. Since that has given them a decent chance of creating growth, the reversal of that trend makes life considerably harder.
On the other hand, it could be argued that Bernanke’s announcement has helped separate the more committed investor from his flighty counterpart. Looking at the correlation between the macro variables and their change over the month before Bernanke’s comments, the relationship is weak or negligible, notes Schroders chief economist Keith Wade. “If fundamentals are affecting performance now, they weren’t before,” he adds. “Equity markets appear to have reversed direction, presumably as hot money exits. In all, this suggests the fall in prices we are seeing now is more about a reversal of hot money flows than a loss of faith in emerging markets, with QE tapering acting as a wake-up call for discrimination within the EM asset class.”
We will have to wait another month or two to find out exactly what the Fed has in mind, but following the knee-jerk reactions witnessed over the past few weeks, a growing number of commentators suspect the reality won’t be so bad. As Hermes Fund Managers chief economist Neil Williams points out: “‘Tapering’ is, after all, a further loosening in monetary conditions, albeit at a slower rate. This is akin to central banks continuing to throw out liquidity, only with a smaller ‘bucket’.”
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