Here’s yesterday’s stock report:
HONG KONG (MarketWatch) — Asian stocks tumbled Thursday after minutes from the latest Federal Reserve policy meeting stoked concerns that central-bank policy-tightening moves will reduce global liquidity, which has supported stocks in recent months.
Hong Kong’s Hang Seng Index /quotes/zigman/2622475 HK:HSI -1.72% dropped 1.7%, while the Shanghai Composite Index /quotes/zigman/1859015 CN:000001 -2.97% plunged 3%, with worries about liquidity tightening by the central bank adding to the selling pressure.
The Fed, along with other global central banks, has provided massive amounts of liquidity to markets since the onset of the global financial crisis — liquidity which has worked its way through to various asset classes.
Perpetual Investments head of investment research Matthew Sherwood said that while stocks had gained aggressively over the past eight months, in part due to central-bank largesse, “all of a sudden” that pillar of market gains may be at risk.
Crédit Agricole strategist Frances Cheung said Asian investors were concerned that “a smaller-than-anticipated size of the Fed balance sheet … would imply less funds available to purchase [assets] than what is currently priced in.”
This can’t be right, because economists assure us that QE has no effect. Bond prices rose on the news, as reported (or should I say “admitted”) in this WSJ article:
Treasurys pulled off minor gains after details from the Federal Reserve’s latest policy meeting initially caused some jitters about less bond-buying support from the central bank. . . .
After battling between gains and losses immediately following the release of the minutes, prices drifted higher as bond investors took comfort in the Fed’s presence. Benchmark 10-year notes rose 4/32 in price to yield 2.01%, according to Tradeweb. The 30-year bond gained 4/32 to yield 3.199%
I have a question for bond market aficionados; what does “took comfort” mean? And what does “Fed’s presence” mean? Why not just say; “Tighter than expected money lowered interest rates, just as Milton Friedman claimed.”
In fairness to the WSJ, things have improved dramatically since the dark days of 2001, when a much more expansionary than expected Fed announcement sent the S&P up 5% and long term bond prices crashed by more than 2%. The (1/4/01) WSJ explanation was laugh out loud funny. Here’s the headline and then the explanation:
Treasury Prices Plummet as Stock Prices Soar On Earlier-Than-Expected Fed Interest-Rate Cut
. . . .Traded said the selling in bonds also reflected the fact that the market had been anticipating an easing of Fed policy soon and had already rallied on the expectation. When the Fed actually cut rates, people were, in bond market terms, “selling the fact.”
That had to be the explanation, because everyone was taught in school that easy money means lower interest rates.
Lots of people were excited when the Fed improved its communication last September, and even I called the move “baby steps” in the right direction. But there’s still far too much discretion, far too much room for mischief. If the Fed takes 1000 years to get unemployment down to 6.5% it will have fulfilled its promise not to raise rates until that target was reached (or until inflation rose above 2.5%.) But that’s still way too much discretion, and the wrong targets. They need a NGDP level target so that loose cannons within the Fed can’t roil the markets with reckless statements. There’s too much at stake. The Fed is gradually improving, but relative to where they need to be they are still just a bunch of children playing with matches.
The Fed tightened policy yesterday. Bernanke ought to be outraged by his colleagues.