World Markets Lower – Blame The Fed
What does it mean when you have a U.S. equity market that sold off Tuesday, futures down Wednesday, the Nikkei down four percent Wednesday, weaker dollar and weaker gold? The same thing as last time: the Fed is, once again, floating the tapering talk.
The traders’ playbook is relatively straightforward. When the fed talks about tapering, traders start selling and with three Fed officials recently saying that they expect tapering to begin as early as next month, the market pressure this week is understood.
On Wednesday, the Nikkei lost four percent or 576.12 points to close at 13824.94—a key resistance level and only about 140 points away for its one-month low. The yen gained more strength against the dollar currently sitting at 97.05.
Gold continues its fall—now at 1273.90. Tuesday, the SPDR Gold Shares (NYSE: GLD) were down 1.38 percent as the ETF continues a pattern going back to 2012 where it prints lower highs and lower lows.
Much of this is likely because of the Fed. First, Charles Evans, president of the Chicago Federal Reserve Bank, said, "We are quite likely to reduce the flow of purchases rate starting later this year - I couldn't tell you exactly which month that will be - and it's likely to wind down over time in a couple or few stages."
He went on to say that he would not rule out cutbacks beginning next month. But that doesn’t mean he sees interest rates rising. He reiterated the Fed’s stance that short-term interest rates would remain near zero until the unemployment rate falls below 6.5 percent.
The July jobs report revealed that the unemployment rate edged down to 7.4 percent. Evans said that he doesn’t expect the U.S. to reach the target unemployment rate until the middle of 2015.
Next, Dallas Fed president Richard Fisher and Dennis Lockhart, president of the Atlanta Fed said earlier this week that they would like to begin cutting back on bond-buying next month.
The Fed’s mixed signals are making world markets frustrated. In June, Fed Chairman Ben Bernanke said that the Fed might reduce bond buying later this year. That sent markets around the world plunging. Then, in what appeared to be a massive campaign by Fed officials, they, along with Bernanke set out to reassure the market that nothing was changing anytime soon.
Disclosure: At the time of this writing, Tim Parker had no position in the ETF mentioned.
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