Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on June 22, 2013
Global Sell-Off Shows Fed Reach Beyond the U.S.
Despite a partial recovery in the markets on Friday, tumbling stock, bond and commodity prices around the world over the past month are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve.
In the weeks since the Fed’s chairman, Ben S. Bernanke, first indicated that the central bank might start to pare back its support for the economy, markets in Asia, Europe and Latin America have fallen even more sharply than those in the United States, threatening economic growth in many countries.
While leading market measures in the United States have declined 4 percent over the last month, an index of the world’s stock markets has slumped more than 6 percent.
“The Fed isn’t just the U.S.’s central bank. It’s the world’s central bank,” said Mark Frey, the chief strategist at the Cambridge Mercantile Group.
The selling picked up in markets around the world on Thursday, a day after Mr. Bernanke’s latest comments on the Fed’s plan to wind down the stimulus. While the reason for the shift by the Fed is good — a strengthening of the recovery in the United States — investors are nervous that the global economy may not be ready.
On Friday, markets calmed down despite the prospect of slowing economic growth and rising interest rates. Asian stocks were mixed, with the Nikkei 225 index up 1.7 percent at the close of trading, European indexes were mostly higher in afternoon action and Wall Street futures suggested a higher opening in New York’s morning.
On Thursday, the benchmark Standard & Poor’s 500-stock index fell 2.5 percent, its steepest one-day decline since November 2011. Treasury prices also slumped, driving yields, which move in the opposite direction, to touch their highest levels in nearly two years. Gold, once a favorite of investors, slid to two-and-a-half-year lows.
Thursday’s damage was more pronounced in a wide array of markets outside the United States, like Philippine government bonds and the Norwegian currency. Stock indexes in China, Europe and Mexico fell more than 3 percent.
Investors were also rattled by reports that Chinese banks had become reluctant to lend to one another. And Europe’s debt woes came into focus again after the International Monetary Fund said it was considering suspending aid to Greece. But traders and investors cited the Fed’s changing policies as the main driver behind the big flows of money around the world.
“The trigger was clearly what is going on with the Fed,” said Ashish Goyal, the investment director at Eastspring Investments in Singapore.
The heavy selling was a sharp reversal after years when low interest rates in the United States encouraged investors to put their money into foreign countries. For investors in once-attractive foreign markets, the fear was that those markets may be on even less firm economic footing than the United States’, and consequently less able to absorb the decline in lending that comes along with rising interest rates.
“When the U.S. embarks upon policies that are appropriate for its own domestic circumstances, it can impose policies on the rest of the world that aren’t necessarily appropriate to them,” said Darren Williams, the senior European economist at AllianceBernstein in London.
Interest rates are a vital determinant and indicator of economic activity. To try to encourage borrowing and bolster the economy after the financial crisis, the Fed has pushed rates down by cutting the interest rates it offers banks and by buying more than $2 trillion of bonds. The extent of the intervention has put markets on a hair trigger for any hint of a change from the Fed.
Mr. Bernanke has indicated that the Fed will pare its bond purchases only very slowly and may increase them again if there are signs the economy is being hurt. That has some analysts calling this week’s market turmoil a panicked overreaction. For the year, the S.& P. 500 index is still up 11.4 percent.
But there are significant concerns that the Fed may not be able to control the convulsions in the markets that Mr. Bernanke has already set off with his comments.
“It’s a very significant moment,” said Sebastian Galy, a foreign exchange strategist at Société Générale. “It’s the end of an extremely aggressive phase of monetary policy globally.”
The American economy is probably not immune to these changes. After years of falling interest rates, which have encouraged a recovery in the housing market, banks have recently been asking for higher interest payments from home buyers. There are already signs that this is putting a damper on home sales. All of this helps explain the recent declines in American stocks. But Mr. Bernanke said that the United States economy was on firm enough footing to withstand the rising rates, and he has promised to intervene if that changes.
The outlook has not been so bright in much of the rest of the world. China and Brazil are wrestling with lower growth rates. Falling prices for commodities are hurting natural-resource-rich countries like Australia and Russia.
After the financial crisis, many of these markets became attractive to investors seeking higher returns in the face of paltry interest rates. Some 55 percent of the Mexican bond market, for example, is now owned by foreigners, up from 25 percent in 2010, according to Claudio Irigoyen, the Latin American strategist at Bank of America.
Hedge funds and other money managers have also been borrowing money on the cheap in the United States and using it to invest in foreign stock and bond markets offering higher returns. Now the prospect of higher interest rates in the United States is causing those investors to quickly unwind those trades.
Smaller investors are also retreating, pulling out of mutual funds and exchange-traded funds that own the bonds issued by developing countries. During the last week, these funds have had the largest outflow on record — $622 million — according to Lipper, a fund data company.
Such outflows may bring back memories of past periods of global financial tumult, when countries like Russia and Mexico defaulted on their government debt partly because of an exodus of foreign investors. But most developing countries are now on a much firmer financial footing than they were in the past, reducing the chances of a crisis stemming from the turmoil.
Still, the current upheaval is already causing pain for many investors. Brevan Howard Assert Management, a powerful hedge fund manager, has seen its emerging market fund drop nearly 12 percent, or $300 million, this year, according to people briefed on the fund’s performance.
“People are trying to figure out how to get out,” Mr. Irigoyen said.
11 Comments on "Global Sell-Off Shows Fed Reach Beyond the U.S."
Arthur on Sat, 22nd Jun 2013 7:50 pm
““The Fed isn’t just the U.S.’s central bank. It’s the world’s central bank,” said Mark Frey, the chief strategist at the Cambridge Mercantile Group.”
That is indeed the plan and to some extent realised and the main reason why the US can afford a 1 trillion $ deficit. And they can even afford a 2 or 3 trillion $ deficit, as long as the rest of the world keeps accepting the $. The $ in 2013 has about 50 times the nominal value of the dollar of 100 years ago. Imagine how many trillions have been created out of thin air and exchanged for real values since Bretton Woods, based on that 50:1 ratio.
Understanding this is one thing, escaping from it, quit another. The creation of the euro is a step. Bilateral trade agreements in non-dollar exchange another. But as long as oil remains a dollar commodity and China is willing to run huge trade deficits for dollar, the days of the dollar are not yet over. And the FED remains the premier central bank of the world.
GregT on Sat, 22nd Jun 2013 11:08 pm
There is no escaping what is to come. Our monetary systems are based on ever expanding exponential growth. When growth ends, so do our economies.
Dmyers on Sat, 22nd Jun 2013 11:56 pm
Bernanke has issued such a weak indication of a policy or practice change that there should not have been any reaction at all. Business as usual. He’s paring back bond purchases “very slowly” and “may increase them again if there are signs the economy is being hurt.” The rationale for cutting Fed bond purchases is BB’s belief that the economy is improving. The economy isn’t improving, so he really isn’t going to change anything.
The sell off is likely due to a widespread sense that things are about to go south, in large part as a result of Bernanke’s money printing. That’s the reason he acted like he’s going to stop. No one believed it anyway, so Bernanke’s words are inconsequential to the events unfolding.
Plantagenet on Sun, 23rd Jun 2013 12:18 am
People who are ignorant of the world beyond the USA seem everything through the prism of the USA.
There was bad economic news from China, and important events in other parts of the world on the same day Bernanke issued his MEH statements.
The global sell-off started in Asia, and was more likely triggered by the news from China.
BillT on Sun, 23rd Jun 2013 3:25 am
Plant, the US Fed IS the world’s banker. It props up the empty banks of Europe, and is deeply involved with many others. Ben found out Thursday, that if he slows or stops printing, the world economy WILL collapse. At least the part that still relies on dollars.
China’s news is not news. It has slowed some, but still is growing at twice the pace of the West. You cannot compare China’s financial system to that in the West. China is still a creditor nation sitting on huge reserves. All Western nations are debtors, sitting on huge holes of debt.
Yes, times are interesting. All I can say is: “Are you prepared?”
J-Gav on Sun, 23rd Jun 2013 9:50 am
Surprise, surprise – even in the markets, the law of gravity still applies …
Arthur on Sun, 23rd Jun 2013 9:58 am
“Ben found out Thursday, that if he slows or stops printing, the world economy WILL collapse. At least the part that still relies on dollars. ”
Are you sure?
Germany does not own a reserve currency but possibly will run a fiscal surplus in 2015, for the first time since 1969. Reason: extreme low interest rates, causing to free a large chunk of the budget.
http://tinyurl.com/mykn3vs
That is the positive return of austerity. And the more Bernanke prints, the sooner the rest of the world will decide to refuse the dollar. And when that happens, all the reserves of trillions of dollars will come home to the US, where they cannot be refused, causing a mega-inflation. Then obviously capital controls will be installed, blocking dollar traffic in the direction of the US, followed seizure of US assets in countries like China, etc. End of globalism, the formation of hostile blocks.
BillT on Sun, 23rd Jun 2013 2:39 pm
Yes, Arthur, I AM sure. Your precious Euro is in the same, or worse, situation as the dollar as your banks have sucked up trillions of dollars from the Fed to keep from crashing since 2008. There is nothing supporting them if the Fed stops the cash flow to European banks. This flow has been facilitated through their branches in the US to keep it hidden.
And if you think Germany is solvent … lol. I don’t see the EU surviving until 2015. Definitely not in it’s current form with the Euro as the common currency.
It appears that the can has hit the wall and is just bouncing back. It is going to be a very interesting summer for all fiat currencies.
BillT on Sun, 23rd Jun 2013 2:44 pm
BTW: I read the German article you tagged, and all I can say is that they have a very good propaganda machine just like the US. But then, they have more experience at it. Nothing negative is going to come out of Germany until after Herr Merkle is re-crowned as fuhrer. Unless the SHTF and they cannot cover it with more… ^_^
Arthur on Sun, 23rd Jun 2013 7:54 pm
“Your precious Euro is in the same, or worse, situation as the dollar as your banks have sucked up trillions of dollars from the Fed to keep from crashing since 2008.”
1 trillion.
“There is nothing supporting them if the Fed stops the cash flow to European banks. ”
There is nothing that would stop the ECB from printing 1 trillion euro. But the European strategy is one of austerity. That is German influence and their eternal fear of inflation.
“I read the German article you tagged, and all I can say is that they have a very good propaganda machine just like the US”
It is Dutch, not German.
“Nothing negative is going to come out of Germany until after Herr Merkle is re-crowned as fuhrer.”
I think she probably will be reelected as she handled the crisis pretty well. Meanwhile the financial situation seems to have calmed down in Europe. Germany now ‘pays’ 0% interest, that means that tens of billions of interest payments can be canceled.
“Unless the SHTF and they cannot cover it with more… ^_^”
The only SHTF I am worried about is the developing situation in Syria and possible escalation around Russian/US weapons deliveries.
BillT on Mon, 24th Jun 2013 11:52 am
Whatever. Google translated it. Herr Merkle is sweeping everything under the rug, because if she is not reelected, Germany may pull out of the EU. The first domino…and it will be back to a bunch of worn out ex-empires fighting with each other. If you think things are calm in Europe, it’s because the trouble is kept out of the news just as in the US. The next big explosion is already building. You cannot run a 50%+ unemployment of riot ages people and not have ‘troubles’. Summer is just beginning.