Spotlight On Central Banks

Not so long ago, stocks in the US and Europe were trading at record highs. Monetary easing had led to considerable amounts of positive sentiment. The implications of these operations were not only sentimental though. From recent macroeconomic data from the US, it is clear how the central bank policy has helped revive markets. But with the revival, has come sensitivity. The sensitivity of the equity markets to central bank policy has heightened. There has been a lot of action around central bank policies, and eventually on the bourses.

The US has been looming over the timing of cuts in the Federal Reserve’s monthly bond-buying programme. The markets saw weakness yesterday as Fed Bank of Chicago President Charles Evans said there is a possibility of the tapering beginning in September 2013.

Right after, Fed Bank of Cleveland President, Sandra Pianalto said that the tapering down could begin as long as the labour market continues to strengthen.

Also commenting was Fed Bank of Atlanta President, Dennis Lockhar who said the tapering could begin at any of the three remaining FOMC meetings this year.

All of these comments weighed on the markets and resulted in the US markets falling by 0.31% to 0.38%.

The scene was no different in Europe. The markets were weighed upon by the prospective scaling back of asset purchases in the US. Moreover, Europe was under pressure because of the ‘not-so-dovish’ stance of the Bank of England (BoE).

For the first time, the BoE gave a forward guidance on its monetary policy. It too linked it to employment, stating that the central bank would maintain its rates at record lows of 0.5% till the country’s unemployment rate drops to 7%.

However, worries surrounding inflation and eventually, the central bank sticking to its rate guidance seeped in and caused a downfall on equities.

In Asia, the crying over fears of the vanishing dovishness of central banks happened yesterday. The day started on a good note as the Bank of Korea held its key rates at 2.5%. This has largely matched expectations. Given the accelerating inflation in Korea, there were views where a raise in interest rates was considered. However, maintaining it turned out to be a sentiment-booster.

Volatility is high on the Asian indices as the markets are dodgy over the Bank of Japan’s policy decision. The government in Japan announced a mid-term fiscal plan that includes spending cuts in order to reach fiscal reform goals by 2015. Now eyes are on the central bank’s decision that is scheduled to be announced shortly.

Investors are also awaiting trade data from China to pick up cues from.

The Indian markets did see a downfall, reacting to the central bank developments in the US and Europe. However, today’s opening in filled with uncertainty. The way Asian markets trade today will be decided by the key events of BoJ policy announcement and Chinese trade data. Till these events show development, volatile trading is expected to continue. The markets are expected to be directionless or swing directions. However, for a firm directional trend for the day, keep an eye on the two data points mentioned.