Could tonight’s US Fed decision trigger a ‘taper tantrum’ and spook the stock market?
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Tonight’s US Federal Reserve meeting is shaping up as a key risk event of the week, as the central bank prepares to answer a number of important questions about the orderly wind-back of its post-COVID policy stimulus.
The Fed will decide whether or not it will pull back (or taper) its pandemic-era bond buying stimulus program that has so far pumped billions into the US economy.
Uncertainty over the decision along with the ongoing saga of Chinese developer Evergrande have sent the CBOE Volatility Index to spike by 25% this week.
The Volatility Index, also called the ‘Fear Index’ measures the expected near-term volatility of the S&P 500 index benchmark.
The market is also worried about a repeat of the 2013 “taper tantrum”, when US treasury yields spiked significantly after the then Fed Chairman Ben Bernanke announced he was putting brakes on QE (quantitative easing).
The taper tantrum however did not lead to a stock market crash at the time.
The US Fed currently buys US$120 billion worth of assets every month, but the market consensus is for this to be pulled back starting in November.
The CEO of global consultant deVere Group, Nigel Green, agrees the Fed will start tapering in November, and thinks that a tamper tantrum will happen.
“On the back of the tapering, we can expect markets to throw a mild ‘taper tantrum’ – a brief collective panic – as values have been inflated by the enormous flood of monetary and fiscal stimulus that have run into financial systems and economies over the past year and a half,” Green said.
However, the market turbulence triggered by tapering would “potentially be less impactful than geopolitical issues that are looming on the horizon”, he said.
Another analyst who’s predicting a tapering in November is James Sullivan, JP Morgan Head of Asia Pacific Research.
Blackrock’s chief investment officer of global fixed income, Rick Rieder, is sitting on the fence, telling CNBC that the Fed will provide the market with a framework instead of a timeline.
“I think they’re going to lay out that they had a discussion on tapering. I don’t think they’re going to provide any details,” he said.
He also believes that recent turmoil at Chinese firm Evergrande will enter the Fed’s discussion, but will not affect its final decision.
Bank of America rates strategist, Mark Cabana, said the Fed will do its best to distinguish and decouple tapering from a rate hike, adding that the weak US job numbers in August may tie the Fed’s hands for now.
Meanwhile, Columbia Threadneedle head of multi-asset strategy, Anwiti Bahuguna, reckons the stock market will not be affected too much by tonight’s announcement.
“By and large, the tapering is probably not a market moving event,” she said, noting the focus will be on the “dot plot” — a chart that depicts the anonymous interest rate forecasts of central bank officials.
For Chris Weston from Pepperstone Group, the focus for rates will be whether the median consensus among Fed committee members brings the timeline for a rate hike forward to 2022.
“In the June meeting, seven of 18 Fed members called for a rate hike in 2022,” Weston noted.
“Therefore, if we get three additional members changing their view for a hike next year the median ‘dot’ projection of the members will move higher.”
Right now, markets are pricing for two rate hikes in 2023. If the Fed doesn’t bring its timeline forward, Weston said there will “almost certainly” be an additional third rate hike flagged for 2023.
Earlier this month, the RBA has made its decision to keep buying back Australian government bonds at a pace of $4 billion a week.
But the bank said it will extend the program until at least mid-February, as opposed to November announced previously.
If a US tapering does trigger a selloff on the ASX, some stocks are bound to fare better than others.
Looking back at the last US Fed tapering in 2013, the best best-performing ASX sectors in the months following were materials and industrials.
But in general, less money in circulation could cause problems for companies that are tight on cash.