Last Wednesday, the Fed announced its decision to taper its bond buying program by $10 billion a month, or 12% of its prior monthly ante of $85 billion. That surprised many, who speculated nothing would happen until 2014 when Ben Bernanke passed the torch to Janet Yellen.
This of course prompted much noodling and jabbering about a host of implications…
Is it a trial balloon, testing the market’s reaction, in preparation for further cuts?
Is Bernanke just trying to ensure he can say he started the taper on his watch?
Will Yellen make further cuts, or increase stimulus at the first sign of economic weakness?
Truth is, it’s probably too early (and futile) to speculate too much. And from my perspective, I’d rather just observe how global markets reacted to the news.
On Wednesday, U.S. stock markets surged higher, closing the day up about 1.75%. Emerging markets (EEM) closed the day 1.3% higher and European stocks (VGK) almost 1% higher.
Interestingly though, emerging markets dropped sharply the following day. That sharp sell-off prompted me to review a chart I’ve shared with you before.
Here’s the comparison between emerging markets (EEM) and European stocks (VGK), each compared to the S&P 500 (SPY):
As you can see, emerging markets (EEM:SPY, in yellow) continue to slide lower, breaking below their July low. At the same time, European markets (VGK:SPY, in white) have held up better and appear to be ticking higher.
Both emerging market and European stocks trailed U.S. stocks dramatically since the start of 2013, so the recent divergence between EEM and VGK is an interesting development that I’ll continue to watch closely.
If a 12% reduction in U.S. central bank stimulus is enough to scare investors out of emerging markets… it could turn ugly fast if further cuts are made in 2014. Stay tuned.