post fed euphoria big game of chicken

The Federal Reserve’s about turn on its plans to taper quantitative easing disappointed market commentators and cast further doubt over trust levels in the authority.

post fed euphoria big game of chicken


While equity markets rose sharply off the announcement by the Federal Open Market Committee, whether this will continue remains to be seen, according to Schroders.

David Harris, fixed income fund manager, said bond markets had expected the tapering of asset purchases – of between $10bn and $15bn a month – and priced in accordingly.

“Shorter term interest rates are so far rallying much more than long rates, showing the taper was fully priced in to long yields while the lower growth expectations should mean short term rates are held near zero for longer.

“Ultimately the Fed will still need to scale back purchases. Not tapering now prolongs the uncertainty, and market volatility will remain high until the Fed is able to provide more clarity about their QE exit strategy,” he added.

Clarity needed

BlackRock CIO of Fundamental Fixed Income Rick Reider also called for greater clarity over the timing and strategy of withdrawal and warned of greater uncertainty.

“The decision not to taper – coupled with the lack of guidance on when tapering may finally take place – brings down our view on the range for movement in the 10-year Treasury by roughly a quarter point to 2.50% to 2.85%. But the range could vary even more widely – and investors may face more volatility – amid the next few weeks of economic data, US budget showdown and debt-ceiling debate and the nomination of the new Fed chief.”

Meanwhile, Old Mutual Asset Managers’ Stewart Cowley said he was “extremely disappointed”.

Chicken commences

He said while the Fed seemed to have noted the slowdown in the build-up of assets since the summer, which has driven up Treasury yields and mortgage rates, the market’s reaction demonstrates a near-obsession with the QE process even five years on from the collapse of Lehman Brothers.

“This nothing to cheer about. It will make the eventual day of reckoning even worse for the bond and equity markets. I suspect the euphoria won’t last long; we are now engaged in the biggest game of ‘chicken’ the world has ever seen – investing in US government bonds has become the equivalent of running into the middle of the motorway to pick up pennies.”

Brian Dennehy, managing director at said when QE is reversed all risk assets will undoubtedly fall. He warned investors to keep an eye on the markets and how they settle over the next week.

“If momentum is lost, start taking profits on equities and bonds. If upside momentum persists, enjoy the ride, but understand the growing risks and consider applying stop losses.”



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