Fed Tapering & the Market Reaction

Last night at 7pm the Federal Reserve (Fed) released their minutes which have been much anticipated by investors.  Many analysts predicted that any tapering of Quantitative Easing (QE) would be pushed forward to the first quarter of next year and would be left untouched for the time being.  However, the news was in fact a surprise and was actually the opposite of the general consensus.

The Fed announced that they would begin to cut back asset purchases by $10bn a month.  Therefore reducing QE from $85bn to $75bn and this will begin in January 2014.  The expected market reaction from this decision was expected to be negative, and there has been much talk about the markets addiction to QE over the last year.  However, we saw a very different market reaction this time round.  The S&P 500 closed up 1.66% on the back of the news with similar rallies in the Dow Jones, Topix, and Nikkei.  At the time of writing, European indices are also up with the FTSE currently trading up 1.01%.  So what is different this time?

The initial tapering announcement in May, and subsequent announcements have come about with a huge lack of guidance and left markets in fear due to uncertainty.  In our December Market Commentary, we mentioned that tapering would be a drag on growth, only unless further clarity is delivered, and this is what was different this time round.

Ben Bernanke, Chairman of the Fed, announced that interest rates in the U.S. would be kept at historic lows even after unemployment falls below the current target of 6.5%.  This stronger guidance has led to the stronger market sentiment.

With regards to the recent changes, we still intend to continue with our strategy of creating liquidity in our portfolios to use as a tactical position.  We plan on selling down some of the multi-asset funds which are currently held, as they have not really contributed to the portfolios in the recent months.  We will then be in a position to use this liquidity to either buy or sell the market by using a tracker.  The position will of course depend on momentum, fundamentals and whether the market looks overbought or oversold.  We anticipate on creating this liquidity over the next few days, depending of course on the direction of the market