The Doves and Hawks Of Central Banks

Central banks and monetary easing have been controlling the directional trend in most global markets. Sharp movement in equities before, during and after the events of release of inflation figures and decision on interest rates are common around the globe as the focus of monetary policy has narrowed on to economic recovery. While the commonly termed hawkish stance of the RBI has caused drastic ups and downs in investor sentiment and hence market movement, it is now time for the Indian markets to have a look at Ben Bernanke’s stance.

The US markets have been seeing new highs lately in a rather unstoppable upward trajectory in equities. The major reason for this highly bullish trend, apart from the timely spurts of positive economic data, was the Federal Reserve’s USD 85 billion a month bond buying programme. Now since the cheap liquidity measures have sent markets at multi-year highs, any developments on this front tend to be ultra sensitive and create instant nervousness. So what happened yesterday?

Initially, stocks rallied as Ben Bernanke said that premature tightening in the monetary policy could strangle economic recovery. However, soon after, in the question and answer session, the major question raised was of when the Fed would taper down its bond buying programme. To this, Bernanke responded by saying that a step down could be taken in the next few meetings. This led to paring of losses and the markets turning bearish. Selling further accelerated when the Fed released minutes of the meeting, showing that a number of officials were pro cutting down on asset purchases.

This led to the markets in the US ending the day lower in the range of 0.52% and 1.11%. Europe ended the day with gains between 0.37% and 0.69%. Why gains? Well, Bernanke’s comments of tapering down in the next few meetings and the release of the minutes happened after Europe closed. Wait for today’s opening! The opening in Asia is negative as well and the SGX Nifty was seen trading lower by 43.50 points at 08:15 AM today.

The hawks and doves of central banks surely trigger the bulls and bears of equities, and in a big way. The sentiment in global equity markets is highly negative and a downward opening in Indian markets today is not doubted.