Is A Fed Taper Bullish Or Bearish For Stocks?
Cam Hui | Dec 09, 2013 01:38AM ET
There is no question about it, last week's US high frequency economic releases tilted heavily to the positive side. The NFP biggie came in ahead of expectations, as well as a whole host of other numbers.
Not surprisingly, the Treasury yield curve has steepened accordingly. The graph below shows the difference between the 2s and the 10s, which bottomed out in 2012 and has been steepening for most of this year.
An equity friendly environment
These developments that point to an improving economy should be equity friendly. Jon Hilsenrath article:
One idea under discussion is to lower that unemployment threshold from 6.5%, which could mean keeping rates down longer. Fed staff research suggests the economy and job market might grow faster, without much additional risk of inflation, if the Fed promised to keep rates near zero until the unemployment rate gets as low as 5.5%. Goldman Sachs economists predict the Fed will lower the threshold to 6% as early as December and reduce the bond-buying program at the same time.
Bearish tripwires
Even though the news of an improving American economy appears to be equity bullish, here are the two bearish tripwires that I am watching for when the Fed begins to taper:
- Does the Fed give the market some sugary syrup to help the tapering medicine go down? (See discussion above about the unemployment threshold).
- How do emerging market bonds and currencies react?
The second consideration is especially important as the last round of "taperitis" almost sparked an emerging market currency crisis as the prospect of QE withdrawal pushed up global risk premiums (see Brazil and Indonesia as the most vulnerable economies once the Fed begins to taper:
The mere mention of Federal Reserve tapering can pressure various emerging markets currencies, but two could be especially vulnerable when the Fed finally does pare its bond-buying efforts.
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Read market moving news with a personalized feed of stocks you care about.Get The AppThe Indonesian rupiah, already this year’s worst-performing emerging markets currency, and the Brazilian real are J.P. Morgan’s picks among developing world currencies that are vulnerable to Fed tapering.
“The risk is [even] higher for expensive currencies. Both BRL and IDR are overvalued versus their 10 year average REER,” Barron’s reported, citing the bank.
The EM Apocalyptic scenario
The EM elephant in the room is China. A Fed taper has the potential to topple China into a global financial crisis that drags down the global economy.
Here's why. Consider that the RMB is pegged to the USD and it has been appreciating slowly against the dollar. Also consider the fact that Qwest Investment Fund Management Ltd . (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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