Thursday, January 30, 2014

Again Sell on Rise

Dear All,

US cuts QE to $65 billion:-

The Federal Reserve on Wednesday decided to trim its bond purchases by another $10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.

Markets in countries with large current account deficits, such as Turkey and Argentina, have suffered steep losses in part because of the prospect of less US monetary stimulus.

These currencies and stocks slumped again after the Fed's announcement, offsetting aggressive interest rate hikes by Turkey and South Africa.

On Wednesday, Bernanke, 60, quietly adjourned his final policy-setting meeting after an unusually tumultuous eight-year stint atop the world's most influential central bank.

Early assessments have been mostly positive. The former Princeton professor has been praised as the steady hand who helped steer the United States and world economies clear of a far more painful recession.

He flooded financial markets with liquidity from an alphabet soup of programs set up on the fly; he printed trillions of dollars through three rounds of QE; and he made bold promises to keep stimulus in place for years to come, tying low interest rates to particular economic outcomes in an approach emulated by other central banks.

As a leading scholar of the Great Depression, Bernanke had a deep theoretical understanding of what to do in the face of a fast-moving banking panic. He put that knowledge into practice when the financial crisis struck.

The finance ministry today said that the US Federal Reserve's decision to trim its monetary stimulus will not affect the Indian markets and all steps would be taken by the Reserve Bank of India and the government to ensure stability.

Perhaps the finance ministry should make this statement in the US, because few in India believe in it. What steps can the ministry take to protect the markets? Will it pump in money to prop up the markets or go on a road show to bring in new investors?

It is a known fact that the only reason the Indian market as well as other global markets have moved up in the last five years is because of the quantitative easing (QE) measures of the US. More than fundamentals, it is liquidity that supported the market. With increasing debt levels in the US and decreasing impact of QE on the economy, the Federal Reserve decided to taper the flow of liquidity in the system.

Federal Reserve's mandate is the US economy; it is not concerned with what's happening in emerging markets. A pause at this stage, say experts would have signalled that the Fed is a slave to the markets rather than to economic forces.

Emerging markets across the globe are in trouble, to say the least. Interest rates are on the rise in many countries (India did it too) to prevent their currency from falling. However, countries like Argentina, Turkey, Russia and South Africa continue to see currency depreciation.

A slowdown in China and currency trouble in emerging markets has scared the ETF (exchange traded funds) investor. A Bloomberg report says that ETFs are witnessing record outflow. More than $7 billion has flowed out of the emerging markets funds in January 2014, the highest redemption since data is available with Bloomberg. Two of the largest funds are witnessing their highest ever redemption since their inception.

The most that RBI and finance ministry can do is try to stabilise the currency by pumping in borrowed dollars that were was raised recently. That is putting good money, that too someone else's, after bad.

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Broken all supports - Again sell on rise.