Taper terror: Markets jittery with eyes on Fed meeting next week

New York: Global equity markets which have skyrocketed on the back of US central bank liquidity slipped Friday on concerns the US Federal Reserve could start scaling back its stimulus as early as next week.

Investors from New York to Mumbai were cautious ahead of the Federal Reserve’s final policy meeting of the year next week. One-fourth of the economists surveyed by The Wall Street Journal see the central bank announcing a pullback at the Fed’s policy meeting next Tuesday and Wednesday.

The BSE Sensex fell 1 percent, or 210.03 points, to end at 20,715.58. It fell 1.34 percent for the week.

The fall in Indian stocks was in line with global equities which headed for their biggest two-week drop since June amid concerns the Fed could start scaling back its stimulus after its two-day Federal Open Market Committee meeting ends on Wednesday.

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The fate of the Fed’s $85 billion bond-buying program, designed to spark stronger US growth, has become clearer in recent weeks as stronger-than-expected retail sales and last week’s forecast-beating jobs report have increased expectations that the labor market could be strong enough for the Fed to pare its bond-buying program in December or January.

“From a strictly economic point of view, they can justify tapering starting next week,” Sung Won Sohn, an economist at California State University told the Journal.

The Journal’s latest forecasting survey was conducted through early this week, after the November jobs report showed US employers picking up the pace of hiring. That is a key benchmark the Fed has set for slowing its bond purchases.

Will India be able to tough it out?

The last time the Fed looked as though it was going to taper its bond buying program Indian stocks were hammered along with every other emerging market and the rupee collapsed. By September the rupee had fallen 20 percent since the beginning of the year to an all-time low against the dollar.

India was among countries like Turkey and Indonesia with the biggest current account deficits that suffered the worst. We also saw foreign money being sucked back to the US as interest rates there started to move back up. India only got a reprieve when the Fed shocked investors in September by maintaining its cash injections of $85 billion a month in full.

Has anything changed since September? India’s economic figures do seem marginally better. Economic growth came in a touch better than expected, at 4.8 percent over the last quarter.

Foreign investors say Reserve Bank of India Governor Raghuram Rajan’s greatest achievement has been to restore a measure of confidence and with it has come stabilization for the rupee. This has encouraged foreign investors to return to the market.

India also reported a dramatic reduction in its current account deficit to $5.2 billion for the July through to September period, or 1.2 percent of GDP, down from $21.8 billion - or 5 percent - in the same period last year.

“India and Indonesia handled the fallout quite well. Their central banks did a great job in the turmoil in the summer. These policies are bearing fruit,” Tim Condon, the head of research for Asia at ING Financial, told CNBC.

“Taper fears are still out there but they’re less acute than they were last summer because people are less worried about another 150-basis-point spike in the yield on US 10 year Treasury notes. So investors are more comfortable that countries with current account deficits will be able to finance them,” he said.

Still, it is unlikely that India will escape a selloff if we witness a pullback in the Fed’s easy-money policies.

“I think the tapering will have an impact on the Indian market. Long-term investors may increase their positions after the market corrects and provide some stability,” Seth Freeman, CEO and chief investment officer at San Francisco-based EM Capital Management LLC, told Firstpost.

Freeman also pointed out that professional investors “will want to harvest gain” before the end of the year so there will be “some natural stock selloff.”

According to Thomson Reuters Lipper data, US-based funds withdrew $6.51 billion from stock mutual funds in the last week, the biggest outflow this year, before the Fed’s two-day meeting next week.

On the flip side, analysts say we can get a “relief rally” after the meeting, because either we will get a very small taper and really strong guidance on rates, or we will get no taper.