Fears of early QE taper take markets downhill

Written by fe Bureau | Mumbai | Updated: Nov 22 2013, 10:15am hrs
Stocks and bonds took a tumble on Thursday as did the currency with the markets interpreting comments in the US Federal Reserves Open Market Committee minutes of October 29-30 to mean it might reduce stimulus in the coming months. The drop in the preliminary print of the November China manufacturing PMI to 50.4, the first fall in four months, also spooked the markets.

In one section, the Feds minutes noted that participants generally expected that the data would prove consistent with the Committees outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.

In another section the minutes stated: Many members stressed the data-dependent nature of the current asset purchase program, and some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings. The yield on the US treasury was ruling at levels of 2.8186% late on Thursday, above Wednesdays levels of 2.7987%.

The Dollar Index, which tracks the greenback against six major counterparts, rose 0.2% following a 0.5% gain on Wednesday.

Foreign institutional investors (FIIs) were net sellers on Thursday for the first time in the last 36 sessions. Local investors too took risk off the table fearing the Fed might pull back its monthly bond purchases of $85 billion earlier than anticipated.

They apprehend such a move would slow flows into emerging markets like India, pulling down stocks and bonds, at a time when the economy is slowing. So far in 2013, FIIs have bought stocks worth $17.2 billion and sold bonds worth $8.4 billion. Despite corporate results being mediocre and chances of interest rates going up further in the wake of elevated inflation, the markets have been fairly resilient with the Sensex holding above the 20,000 mark. Much of the buying has been done by foreign funds which believe the next government would be led by the Bharatiya Janata Party and would be a relatively strong coalition.

The rupee weakened for a second straight session on Thursday, losing 0.6% to close at 62.925 to the dollar, while the yield on 10-year government bond rose four basis points to 9.08%, the highest since August 19. Stocks lost a fair bit of ground as the Sensex posted its biggest decline in more than two months, slipping 2% to 20,229.05 . The broader Nifty gave up 2.02% to settle below the psychological market of 6,000 at 5,999.05.

The trend was in keeping with that across the globe. Overnight, US equities ended marginally lower, while most Asian indices ended down 1-2% on Thursday. Most European indices were trading down 0.5% to 1% at the time of going to print.