Taper Taper Taper !

There is only one word being talked in the global capital markets i.e. Taper. With the day 1 of FOMC discussion ending, three possibilities are being discussed in the USA.

1. The consensus forecasts indicate a USD 10 -15 billion cut in the Fed’s current USD 85 billion in monthly bond purchases.
2. Few believe that Fed may hold off on tapering at this juncture
3. A dooms day if a larger tapering is announced.

The three possibilities need an individual attention as each of them will have specific effect on the domestic currency and capital markets.

1. If Fed announces USD 10 -15 billion in tapering, then Global / Indian markets would still show crack. Even though some are of opinion that the markets may have discounted USD 10 billion tapering, it should be noted that the markets have shown a recovery in September 2013 mainly due to the improvement in the sentiment after new RBI Governor has taken the chair. Indian markets do not seem to be ready yet for cut in the QE and hence volatility is the word if cut is announced. Yesterday Indian rupee depreciated by more than 0.8% against the dollar indicating that the concerns are not yet done fully.
2. If there is no announcement of tapering, then the markets should cheer as the global liquidity would remain intact and there would not be major capital outflow. This however also means that the US economy is not as strong as it seems which a bad news for the US equities.
3. If Fed goes for a bigger cut in the tapering then it would have a larger ramifications on the global / Indian markets with crack larger then imagined. The possibility of a larger cut is bleak but cannot be ruled out.

The US equities as per the strategists there have discounted the USD 10 billion in tapering. The US Equity markets yesterday closed on gains whereas most markets across the globe turned volatile. European markets edged lower with all eyes on action of FOMC.

Asian markets except Nikkei have turned volatile slapping all the gains on the back of the two out of three possibilities of cutting the QE amount. Nikkei has turned positive due to the currency weakening.

The Indian markets should remain range bound ahead of the tapering news. As two in three chances indicate a tapering hence any bullish position should be avoided at the moment.