Asset prices fall after Fed statement

TradingPub Admin | June 20, 2013

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If you want some free trading education, you may benefit from learning about how the value of various assets declined on June 20, the day after the Federal Reserve indicated that quantitative easing might end next year depending on the state of the economy and the labor market.

Possible changes to QE
On June 19, a two-day meeting of the Federal Open Market Committee concluded, and a statement was released by this group to coincide with the end of the event, according to Bloomberg. During a press conference, Federal Reserve Chairman Ben Bernanke stated that later this year, the existing program of asset purchases could start being pared down.

In addition, he said that the bond buying could be halted altogether halfway through 2014 if the global economy exhibits strength that is robust enough to meet the central bank's expectations, the media outlet reports.

Currently, the Federal Reserve is purchasing $85 billion worth of assets every month, and has been following such a program since late in 2012. It has also used policy to stimulate the economy by keeping benchmark interest rates close to their lowest levels on record.

Bernanke indicated that while the current regimen of bond purchases could be changed if the health of the economy permits it, interest rates will likely remain at low levels for some time, according to The Wall Street Journal.

Impact on asset markets
Michael Gapen, who works as a senior U.S. economist for Barclays Plc. in New York and previously served for the Federal Reserve's Division of Monetary Affairs as an economist, noted the changing nature of stimulus, and the impact that it could have on the markets, according to Bloomberg.

"The vast, highly unprecedented, highly accommodative monetary policy stance that's been so supportive of the recovery has begun to turn," he told the news source. "The markets for the next several years or more will have to deal with the withdrawal of that support."

Gaspen was not the only expert who provided less-than-rosy forecasts for asset markets. Darren Williams, European economist at AllianceBernstein, noted that many global investors may be looking at a different landscape in terms of these markets, according to The Wall Street Journal.

"Investors had a relatively easy time over the last couple of years," Williams told the news source. "Looking ahead the environment will be more difficult for them, and it will be more important to consider carefully each investment decision. In Europe, there is a clear risk for the periphery."

Falling assets
As a result of the FOMC statement and the subsequent market reaction, many assets have fallen in value, with major U.S. stock indices dropping more than 1 percent in early trade, according to the media outlet. At the time of report, the S&P 500 was 1.1 percent lower at 1,611.5 and the Dow Jones Industrial Average was down 1.1 percent at 14,950.8. In addition, the prices of U.S. Treasury bonds fell to their lowest in almost two years.

Yields rose on various bonds, including German bunds and debt-based instruments issued by Japan, Bloomberg reports. Since prices and yields are inversely related, the sharp increase indicates reduced demand for the securities. In addition to the falling bond prices, gold dropped below $1,300 per ounce, and declined to its lowest in more than two years.

It is important to note that even though asset markets are displaying these strong reactions, Bernanke specified that the future actions of the Federal Reserve are not set in stone, indicating that the decisions of the FOMC are not "deterministic," according to the news source.

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