Global Equities Decline As Bernanke Surprises With USD 10 Billion Taper

Indian markets yesterday remained range bound as everyone on the street was awaiting US Federal to announce its policy statement. After a surprise act of RBI to hike the repo rates by 25 basis points, no one had guts to take a bold step and take any new exposure to the equities. Further it is the expiry for the January contract today (Last Thursday of the month), it was another reason why everyone was in a cautious mood.

The Fed statement is out and Ben Bernanke (US Fed Chairman) has managed to surprise many on the street. Everyone had expected that, Bernanke would maintain a status quo in term of QE. Even we had stated in the past that, Bernanke would not surprise the Street at his last policy meet. Federal Reserve policy makers cut the pace of bond buying for a second straight meeting, uniting behind a strategy of gradual withdrawal from Ben S. Bernanke’s unprecedented easing policy as Janet Yellen prepares to succeed him as chairman.

The Federal Open Market Committee (FOMC) in its statement said it will trim monthly purchases by USD 10 billion to USD 65 billion, citing labour-market indicators that were mixed but on balance showed further improvement and economic growth that has picked up in recent quarters. Noticeable factor is, it was the first meeting without a dissent since June 2011, showing the tapering strategy has brought together policy makers. The central bank left unchanged its statement that it will probably hold its target interest rate near zero well past the time that the unemployment rate falls below 6.5 percent.

It was no surprise that the equity indices witnessed decline all over the globe.  While the Dow tanked 1.21% (closed at 15738 down 190 points) The S&P 500 also declined by 1.03 % to close the day at 1774 (Down 18.30 points).

Even the Asian stocks declined for the fifth time in six trading sessions after the Federal Reserve pressed on with cuts to U.S. economic stimulus and the yen climbed against the dollar. Experts suggested that, given the likelihood of continued Fed tapering in the period ahead, there appears little doubt that long emerging market positions are likely to be subjected to near-term pressure.

Apart from that what has added to the pressure is, China’s manufacturing contracted for the first time in six months in January, adding to stresses in the world’s second-biggest economy, a private survey of purchasing managers indicated. A Purchasing Managers’ Index fell to 49.5 from 50.5 in December, HSBC Holdings Plc and Markit Economics said in a statement today. The reading compared with the median 49.6 estimate in a Bloomberg News survey of 14 economists. A number below 50 indicates contraction.