NEW YORK (
Federal Reserve Chairman Ben Bernanke provided the clarity markets wanted on Wednesday; it was just not the answer they wanted to hear.
In spite of the many reasons analysts cited about why the Fed should continue its easing measures, Bernanke stated that the bond-buying program would start to wind down later this year.
This policy choice had global ramifications. Emerging markets and sectors tied to economic growth were dependent on the low rate environment and troves of easy money flowing their way. Upon the news, these assets sold off and have continued to trend downward as the negative sentiment builds.
The first chart below is of
Barclays 1-3 Year Treasury Bond Fund
Barclays 20 Year Treasury Bond Fund
(TLT), a measure of the
Treasury yield curve.
Long-dated Treasuries have been selling off as investors predicted that the Fed would start to wind down monetary stimulus. Although we remain in a low inflation environment and rates are expected to stay at record lows through 2015, markets are beginning to price in the long-term correction without added stimulus.
By Bernanke stating that the Fed was choosing to create less artificial demand for long-dated Treasuries, investors sold off these assets. The curve should continue to steepen for a considerable time longer on fears of inflation.
The next chart is of
CurrencyShares Australian Dollar Trust
CurrencyShares Swiss Franc Trust
The franc has been one of the least volatile currencies lately, and has provided a great currency to compare against because of its safe-haven features. The Aussie dollar, on the other hand, is a commodity-linked currency and has been hostage to news flow out of the U.S., Japan, and Australia's largest trading partner, China.
As investors question how willing central banks are to support their economies, this pair has trended downward. A stronger U.S. dollar led to weaker currency prices, which also weighed heavily on the Aussie.
Weakness out of China has similarly affected the price action. Chinese manufacturing data, released on Thursday, showed that this Chinese sector remains weak. That calls into question Chinese growth estimates and thus China's demand for raw materials.