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Look for the next few days, if not weeks or months, to be a bumpy ride for world markets. While Mark Carney’s remarks today (see my ADVFN colleague Tom Frew’s remarks) will have some impact on the London Exchange, the whole world is reacting to signs that the Federal Reserve is on the verge of a pullback of its stimulus actions.
There is a plethora of headlines this morning that sound like Chicken Little, but with a forecast that is much more likely to be accurate. Here is a sampling:
Stock futures fall on concern over Fed stimulus drawdown – Reuters
Stocks stuck in red as taper talk returns – CNN
Futures decline amid renewed Fed tapering concerns – CNBC
UK Market Drops – NASDAQ
Nikkei closes down 4% as yen rises on Fed uncertainty – CNBC
Nikkei’s slide weighs on markets – Seattle Post Intelligencer
Anxiety About Fed Further Deflates Market – New York Times
U.S. Stocks Head Toward Biggest Drop Since June – Wall Street Journal
Most European Stocks Drop of BOE Comments – Bloomberg
Most of the turbulence was caused by statements from two men, both Federal Reserve officials.
Dennis P. Lockhart, who is the President of the Federal Reserve Bank of Atlanta, said that it is possible that the drawback could begin as early as next month, i.e., September. In the same meeting with Market News International, Charles Evans, Lockhart’s counterpart in Chicago, said essentially the same thing, only in reverse. He said that a reduction in stimulus measures could come later this year, possibly in September. The reality is that this is not news. This is a reiteration of speculation that had been spawned from remarks by “Fed Head,” Ben Bernanke, on 20 June. In that ADVFN story we commented on how one man’s conversation can affect the entire world economy. Today, we learn that remarks by just two of his underlings can generate even more anxietyand paranoia.
Those who follow Fed activity closely, understand that the world economy is no longer a macrocosm. It has become a microcosm according to the Fed itself. In a paper published during Q2 2013 entitled “The role of time-critical liquidity in financial markets,” the Fed revealed that
“Under conditions of time-critical liquidity, a settlement payment, delivery of securities, or transfer of collateral must be made at a particular location, in a particular currency (or securities issue), and in a precise time frame measured not in days, but in hours or even minutes.”
The average man or woman on the street cannot begin to conceive what has happened to world finance. We now live in an age when a word fitly spoken – or unfitly spoken – can cause enough concern to throw world markets and economies into turmoil.
Just a couple of decades ago, statements by the Fed or the BOE would have a ripple effect like a small stone being tossed into a quiet pond. The same kind of announcements today have the effect of a one-ton boulder being dropped into the middle of the same pond. That produces much more than ripples, it produces turbulence. Using airline terms, twenty years ago, announcements by central banks were like headwinds or tailwinds. When they speak today, your pilot asks you to “Fasten you seat belts. There’s turbulence ahead.”
