Violent
sell-off in world markets after Federal Reserve signals end to QE
Ben
Bernanke's comments spark a global fall in stock markets and
commodities, and strong rise in government bond yields
26
January, 2013
Stock
markets worldwide plummeted on Thursday, after the Federal Reserve
chairman, Ben Bernanke, rattled investors by signalling an end to
America's drastic recession-busting policy of quantitative easing.
Share
prices across the globe have surged over the past year, helped by an
unprecedented injection of cheap money, with the Fed buying up $85bn
(£55bn) worth of bonds every month, and the Bank of Japan pledging
"shock and awe" QE to revive a stagnant national economy.
But
when Bernanke laid out a timetable on Wednesday night for cutting off
the Fed's bond purchases by mid-2014, his words prompted a violent
sell-off, which began in New York after European markets were closed,
and ricocheted around the world on Thursday, from Tokyo to Istanbul
and Oslo to Jakarta. In London, the 2.98% decline in the FTSE 100
index was the steepest since September 2011.
Elsewhere
in Europe, shares suffered their biggest one-day fall in 19 months,
with Spain's Ibex losing 2.9%, and the German, French and Italian
markets all down by more than 3%.
The
slide on Wall Street resumed when US markets reopened on Thursday.
After heavy selling throughout the day the Dow Jones closed down
2.3%.
"We've
had a market that for some years has been addicted to stimulus, and
it's taken a brave man to say it has to end somewhere," said
Neil Mellor, of BNY Mellon. He added that the true test of whether
the US economy was strong enough to cope without QE would come when
the prop of cheap money had been removed. "We don't know if
there's a credible recovery there; we're peeling back the plaster."
Bond
prices also fell worldwide, a trend that will push up borrowing costs
for governments and consumers if it is sustained. Andy Haldane, the
Bank of England's outspoken director for financial stability, warned
last week that through QE, policymakers had deliberately inflated
"the biggest bond bubble in history".
He
added that a "disorderly reversion in the yields of government
bonds globally" was the greatest risk to financial stability.
The yield – or interest rate – on British government 10-year
bonds jumped to 2.3%, the highest level for more than a year,
although it remains low in historical terms.
Growing
fears of problems in China's banking sector, as the authorities try
to manage the transition from rampant, export-led growth to a more
sustainable, consumer-led economic model, also helped stoke
investors' alarm. Those concerns sent the price of many commodities –
dependent on Chinese demand – deep into the red.
The
price of gold plummeted more than 6% on the day, falling through
$1,290 an ounce, down 30% from its peak. Investors who feared that QE
would unleash a wave of inflation have taken refuge in the safe haven
of the precious metal over the past two years. Silver fell even
further, down more than 8% on the day.
The
cost of a barrel of oil also dropped, by almost $4. Commodity firms
were among the biggest fallers on the FTSE, with BHP Billiton down by
4.6%, and mining and trading company Glencore Xstrata down by 4.75%.
Bernanke,
who looks likely to leave his job at the end of his term next
January, was careful to stress that bond purchases would be halted
only if the economy continued to improve. But investors nevertheless
took his statement as a strong signal that the days of cheap money
are coming to an end.
"The
markets are extrapolating," said Russell Jones, of Llewellyn
Consulting. "The danger for policymakers is that if it
continues, and you get a big interest rate shock through the bond
markets, and a big equity market shock, that in itself slows the
economy down. There comes a time when this sort of reaction becomes
self-defeating. We're not there yet, but if this goes on, it's a
risk."
With
bond yields rising and currencies falling across scores of emerging
markets, there is also a risk that vulnerable countries, heavily
dependent on flows of "hot money" from foreign investors,
will be plunged into crisis. In Turkey, where a wave of recent
protests has highlighted the political risks for investors, shares
closed more than 21% lower than their high last month.
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