Market Reaction to tapering

Market Reaction to Tapering

While Bernanke’s tapering statement didn’t represent an immediate shift, it nonetheless frightened the markets. Once the Fed begins to pull back on it stimulus, the markets may begin to perform more in line with economic fundamentals – which in this case, means weaker performance. Bonds indeed sold off sharply in the wake of Bernanke's first mention of tapering, while stocks began to exhibit higher volatility than they had previously.

The Dow was pushed down 105 points - but the idea of Fed stimulus has caused much more turmoil in certain overseas markets. The problem: A corresponding hike in U.S. debt yields has fuelled higher borrowing costs around the globe. This has led to the flight of cheap capital out of emerging currencies and markets. The markets subsequently stabilized through the second half of 2013 as investors gradually grew more comfortable with the idea of a reduction in QE.

The currencies of India and Turkey fell to new all-time lows against the U.S. dollar while bond prices fell. Indonesia's currency, the rupiah, also fell to its lowest level since 2009. Stocks in Eastern emerging economies like Indonesia, Thailand, and the Philippines plummeted. The Philippine Stock Exchange alone plunged nearly 6% this week.