Federal Reserve Chairman Ben Bernanke shocked the world yesterday afternoon by announcing the Fed intended to start tapering the $85 billion a month bond purchases of its quantitative easing program this fall, with an expected end date of a year from now. Treasuries crashed, the dollar shot to the Moon, and equity and commodity markets all over the world looked like this:
Precious metals were caught up in the crash, with gold falling through the $1,300 mark and silver breaking under $20. Due to the Chinese government's tight money policy, which has been smothering their market, there was little physical gold demand on the drop. Combined with the Indian rupee falling to an all-time low against the dollar, there was no physical support for gold in Asia at all, which led to a series of sell stops being triggered.
In Asia, the HSBC flash PMI for China showed further contraction, coming in at 48.3 for June, a 9-month low. This compares to the 49.2 recorded in May. Interbank interest rates are now at a record high in China, and Chinese stocks dropped another 3.3% on Thursday. Hong Kong stocks fell again, down over 2%, while the Nikkei fell 1.7% as the rampant dollar depressed the yen. One bright spot in Japan was the news that manufacturing sentiment is at its highest level since 2011. Crashing commodity prices (including oil imports) was also good news for their export-driven economy.
As mentioned above, the Indian rupee hit an all-time low overnight, triggering market intervention by the Indian central bank. Until both the rupee recovers and we get out of the summer market doldrums, expect Indian gold demand to be low. The low prices have set off fresh physical demand in the U.S., as some investors see the Fed's announcement as the beginning of the end of artificially low inflation. Many believe that the nearly $4 trillion of liquidity pumped into the market by the government will lead to high inflation and dollar devaluation.
In Europe, stocks were down over 2% and bond yields climbed on the news that the Fed actually had plans to taper their quantitative easing program. The euro dropped to 1.32 and is expected to fall further as the dollar plays Godzilla on the currency markets.
In the U.S., treasury yields hit a 15-month high on Bernanke's press conference, and stocks gyrating wildly lower as investors bolted for the lifeboat that is the dollar. The dollar index is over 82 this morning, after spending the last few days struggling to stay above 80. This is despite first-time jobless claims last week rising 14,000 more than expected, to 354,000 new unemployment claims. The four-week moving average of first-time claims rose 2,500 to 348,250.
The National Association of Realtors announced that existing home sales for May rose 4.2%, to the highest level since November 2009 The median price for existing home sales rose an astounding 15.4% to the highest level since July of 2008. The Fed's announcement of ending its purchase of $40 billion of mortgage-backed securities by next summer should increase mortgage rates, which should temper what some (including Kansas City Fed president Esther George) see as a growing real estate bubble.
The Fed's decision to taper and eventually end quantitative easing (which they could easily reverse should they want) puts us in uncharted territory, as other central banks continue their easy money (some say deliberate currency devaluation) policies.