Global markets tank after Fed offers no clues; a worse day for Sensex?

New York: Stocks around the globe took a beating on Wednesday as investors couldn’t find the clues they were desperately looking for from the just released Federal Reserve’s July policy meeting. In the minutes, Fed policymakers indicated they are still on track to slow the central bank’s $85 billion bond-buying program this year and end it in mid-2014, but gave no signal whether the scale-back could begin in September.

The minutes from the July 30-31 meeting released on Wednesday show US officials disunited about the appropriate timing of the first reduction in bond purchases, with “a few” officials with votes on policy looking to move soon and “a few” others urging “patience” and more of a wait-and-see approach.

[caption id=“attachment_1051893” align=“alignright” width=“380”]  Reuters[/caption]

US stocks took a dive immediately after the 2 pm ET release of the minutes but recovered and then plunged all over again! The Dow Jones industrial average fell 105.44, or 0.7 percent, to close at 14,897.55. The Dow is now riding a six-session losing streak and closed below 15,000 for the first time since July 3.

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While the Fed minutes didn’t send a clear message of exactly when quantitative easing will start to be pulled back, the kneejerk market reaction suggests investors expect tapering to begin in September. Some investors are betting the Fed will start winding down its $85 billion per month bond buying purchases by $20 billion at the September 17-18 policy meeting, a view that got a boost from positive US employment data last week.

That belief already has drawn billions of dollars in capital back from countries like India, Brazil and China to US assets with investors seeking the relative safety of US equities. Things in India have been particularly bad. Stocks have plunged 11 percent this month and investors are reallocating funds from India to the US. India’s 30-stockBSE Sensex fell 1.9 percent on Wednesday to close at 17,905.91, the lowest in a year.

The rupee on Wednesday hit a low of 64.33 to the dollar amid investor scepticism about the policies of the Reserve Bank of India and the Manmohan Singh government. Traders said the sell-off was intensified by “policy flip-flops” from the RBI. On Tuesday, the RBI announced that it would inject over $1 billion into the markets, just days after saying it was working to tighten liquidity.

“It’s taking neither a hot nor cold stance to protect its currency and this indecision is fueling the market’s selling bias when it comes to the rupee,” Kathleen Brooks, a research director at FOREX.com told CNN Money.

The government and the RBI have issued a series of directives in recent days to stem the rupee’s plunge and stop capital outflows that are pushing India toward its biggest crisis in more than two decades. There are new restrictions on outward direct investment by Indian companies and individuals and the government has increased the import duty on gold to a record 10 percent.

“Far from reassuring investors, however, the hotch-potch of measures has created the impression that the Indian authorities are flailing around for stopgap solutions rather than devising any long-term strategies for economic recovery,” said the Financial Times.

Most investors feel Singh’s weak coalition government has struggled to push through reforms and has no firepower for making badly needed structural changes and pushing through big bang reforms as it faces elections by May 2014.