We can thank the Federal Reserve (“Fed”) Chairman, Ben Bernanke, and his comments on tapering of quantitative easing for the ongoing volatility in capital markets. In May 2013 he hinted that the US$ 85 million per month bond purchase will be reduced aseconomic recovery in the U.S. may be satisfactory to implement reduced stimulus. This comment may send US bond yields soaring from 1.65% to almost 3% in the next 4 months. South African & Emerging Market bond yields followed the same pattern as did most high yield asset classes, such aslisted property and high dividend yield stocks. These asset classes are the cornerstone of low risk portfolios, which experienced unprecedented price volatility and, in some cases, temporary capital loss as a consequence.
On 18 September the Fed reversed its views and commented that there has been “growing underlying strength in the economy”, but wants to “wait until more progress has been made before adjusting the pace of its bond purchases”. While the Fed’s decision is unsurprisingly bond, equity and emerging market currency positive, we expect ongoing volatility as the communications from the Fed remains confusing.
To demonstrate how much fun it is to manage money in these circumstances I’d like to share some recent comments from sources (which I will refrain from crediting or discrediting by not naming them):
- “Should the Fed announce a more aggressive tapering, we expect significant emerging market weakness. We expect the rand to breach 10.05 to the dollar should the Fed announce a cut in QE of $20bn or more. Both US treasuries and the SA long bond yield can be expected to spike.”
- “In this scenario South African interest rate plays (retailers, property and banks) can be expected to lose about around 5% in the open tomorrow (based on a duration of about 6 for the index, a 50bp move in long bonds and exposure to the weaker rand.”
- “It appears that consensus is for a $10bn cut to treasury purchases with no cut in Mortgage Backed Securities. Should this occur, we expect no change to markets.”
- “In our scenario we expect the Fed to delay tapering. We expect the rand and other emerging market currencies to show further strength. Our expectation for the rand in this case is R9.60. In this scenario both the US long bond yield and the SA long bond yield can be expected to decline. In this case we would expect the interest rate plays (retailers, banks and property stocks) to outperform the resource counters by about 3% in the open of trade.”
It appears that this last commentator had it right, but at the same time it explains the influence of Fed actions in our capital market.
The best comment, post Fed meeting, brings some humour to end this weekly comment: “I pledge allegiance to the Federal Reserve of the United Banks of America, and to the Dealers, to which it pays, one system, under Ben, with liquidity and profits for all.”
In conclusion, trying to time markets on a very short term basis is a mug game, especially when based on central bank guidance.
So much for Guidance... Fed up...
