The Federal Reserve’s chief Ben Bernanke laying out a path to gradually reduce the pace of stimulus by the end of 2013 and end the programme by mid-2014 has sent shockwaves across global risk assets. Equity markets in the US sold off rapidly Wednesday following Fed chief Ben Bernanke’s comments over monetary stimulus, weighing heavily across Asian markets in overnight trade. European share markets are responding accordingly [registering sharp falls] although some of the selling pressure seen at the open has eased. The euro gets a knocking versus a stronger dollar, commodities are sliding across the board, peripheral bond yields are on the rise and core government bonds are on the back-foot. Nothing seems safe at the moment!
Asia being one of the biggest winners of easy Fed money also had to contend with a disappointing economic reading from China where the HSBC manufacturing PMIs fell to a nine-month low of 48.3, firmly below the 50 mark which signals contraction. This led to a prompt selloff in the Aussie dollar and commodity prices with gold off over $50 at the European market open. Indeed, HSBC in a note to clients cut its view of China to neutral and reduced its GDP forecasts for 2013 to 7.4% from 8.2% and 2013 to 7.4% as well from 8.4%. Mining shares in Europe are bearing the brunt of the losses on the back of this, followed by financials which are mostly responding to the risk-off mood triggered by the Fed’s comments.
Looking closer at the Fed comments, the central bank came to its decision to lay out a plan to unwind stimulus by year end and halt the programme by mid-2014 based on improved economic forecasts for 2014 and a decline in the unemployment rate to 7% by mid-2014. The Fed was optimistic on the US economy saying that downside risks to the outlook of the economy and the labour market have diminished, building the case for tapering of stimulus. That said, Bernanke did state that tapering will be dependent on economic data which suggests that if we see an expansion in economic growth before the Fed’s year-end target, the central bank could bring tapering forward.
Conversely, a surprise deceleration of US economic growth would mean the Fed will commit to its year-end target or push it back further. The main take-away from this meeting is that the Fed believe the US economy is improving and the time has come for quantitative easing to come to an end. It was inevitable that QE will have to be reduced/halted over the next 12 months and since May 22, markets have had time to absorb this. That said, we are in for a turbulent few months until the Fed starts the process of unwinding with volatility expected to grip the markets daily as spread betting and forex investors adjust their portfolios in wait for the reduction of liquidity in the global market place. Traders are also jittery that the Fed may be pulling the plug to soon but those fears would be put to bed once we see material expansion in US economic growth.
Now turning to this morning’s big news out of the UK banking sector, the Bank of England revealed £27.1billion bank capital shortfalls across some of the country’s largest banks, stating that they will need to raise more than £13billion or face action by authorities. According to the PRA’s report, RBS has a capital shortfall of £3.2billion, Lloyds Banking Group of £7billion, Barclays of 1.7billion and the Co-Op bank of £1.5billion. HSBC and Santander have been excluded in the list with the PRA saying the two do not need to raise capital.
UK banking stocks have pared some of their opening losses as investors have welcomed the PRA’s report as it will urge banks to promptly raise fresh capital in order to remain solvent. In his annual Mansion House speech, Chancellor George Osborne confirmed his desire to privatise the government’s stake in Lloyds but said little on the timing of this. On RBS, Osborne expressed interest in a radical restructuring at the bank, putting toxic loans into a bad bank. Looking to today’s economic agenda, PMIs from the euro zone are in focus with Germany’s mixed [services improving, manufacturing improves] and French improving on both fronts. In the UK, we have retail sales data while in the US, weekly jobless claims and existing home sales.