Fed step hits markets across the world

Federal Reserve chairman Ben Bernanke on Wednesday offered the clarity markets wanted, which turned out to be hardly the kind they wanted to hear, The Street reports.

Despite the several reasons that analysts cited about why the Fed needed to continue its easing measures, Bernanke stated that the bond-buying programme would be progressively curtailed from the end of this year according to the report.

The policy step led to global impact as emerging markets and sectors tied to economic growth were dependent on the low rate environment as also huge amounts of easy money on tap. The news triggered an assets sell off and these continued to trend downward with the negative  sentiment building.

The first chart below is that of Barclays 1-3 Year Treasury Bond Fund (SHY) over Barclays 20 Year Treasury Bond Fund (TLT), a measure of the Treasury yield curve.

Long-dated Treasuries had been selling off with investors predicting that the Fed would start to wind down monetary stimulus. According to analysts, although the economy was in a low inflation environment with rates expected to stay at record lows through 2015, markets were beginning to price in the long-term correction without added stimulus.

With Bernanke stating that the Fed was choosing to create less artificial demand for long-dated Treasuries, investors sold off these assets, and the curve is expected to continue to steepen for a considerable time longer on fears of inflation.

The next chart is that of Currency Shares Australian Dollar Trust over Currency Shares Swiss Franc Trust.

The franc has been one of the least volatile currencies in recent times, and has been a great currency for comparing against due of its safe-haven features. The Australian dollar, on the other hand, was a commodity-linked currency, hostage to news flow out of the US, Japan, and Australia's largest trading partner, China.

Meanwhile, the S&P 500 logged its biggest drop in over a year and a half one as a series of domestic reports were released yesterday.

The number of Americans filing for unemployment benefits rose in the previous week, while existing home sales surged in May to its highest level in over three years. Despite encouraging reports, housing stocks were hammered. Further, all 10 sectors of the S&P 500, ended in the red.

The Dow Jones Industrial Average (DJI) fell sharply by 2.3 per cent closing the day at 14,758.32, while the S&P 500 nosedived 2.5 per cent to close the trading session yesterday at 1,588.19. The tech-laden Nasdaq Composite Index was down 2.3 per cent to end at 3,364.64.

The Fed's bond buying programme had acted as a catalyst to the markets, lifting major indices higher this year, however, following Bernanke's testimony on 22 May markets were down on fears that Fed might taper the bond buying programme sooner than expected.

Markets were down sharply on Wednesday and Thursday following Bernanke making it clear that the Fed might slow down its bond buying programme later this year. If the economy improved, bond purchases might end completely by mid-2014.