FX Week 2 June 2013 |
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Financial markets were volatile last week, driven by expectations about a change in Fed monetary policy. Specifically, markets are becoming fearful that the Fed could begin to ‘taper’, or reduce, its open-ended QE purchases of Treasury bonds and MBS assets, if not at the upcoming Fed meeting in June, then most likely later in the year. Indeed, last week we wrote that a H2 ‘tapering’ was now firmly in play, and the price action over the last few days appears to have vindicated this view. Yields on US government debt surged on Wednesday, breaking the range that had been in place during the first half of the year, following surprising strength in US consumer confidence in April, as well as further signs of the ongoing recovery in US house prices.
This followed comments the previous week by Fed officials (including from Chairman Bernanke) suggesting that QE could begin to be eased ‘in the next few meetings’. US 10-year bond yields reached as high as 2.23% on Wednesday, up from 1.61% at the start of May, while equity markets also lost ground having reached record highs only days before. Japanese equities were amongst the worst affected, falling by 13% from their 23rd May peak, with Japanese bond markets having already begun to cause jitters about whether ‘Abenomics’ was actually likely to succeed in righting the Japanese economy. Emerging markets, which have been amongst the principal beneficiaries of QE over the past few years, were also significant casualties, seeing their bond yields also rising sharply.
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