Fed Holds Off On Taper, Everything Spikes

September 18, 2013

Asset prices spike as Bernanke Fed decides against tapering quantitative easing, for now.

ETFs canvassing a broad array of asset classes, particularly emerging markets and Treasurys, received a shot in the arm Wednesday after the Federal Reserve’s unexpected decision to retain its $85 billion-a-month bond-buying program. The Fed's decision came in part because the central bank fears that the upcoming debt-ceiling debate in October might derail a still-fragile recovery.

Stocks hit new records, Treasury yields lurched lower and gold moved higher after the Fed decided that it would keep in place the “quantitative easing” designed to keep borrowing rates relatively lower to help stimulate borrowing and, in turn, economic growth in the wake of the 2008-2009 downturn and its extended aftermath.

The reintroduction of inflationary pressures that had been taken off the table in recent months by the Fed's talk of tapering "quantitative easing" also lifted gold prices today by more than 4 percent, and the world's biggest gold miners' ETF rose 10 percent.

The physical bullion ETF, the SPDR Gold Shares (GLD | A-100), also rose today, by $4.90 to $131.33 a share. The ETF has fallen by nearly 20 percent this year on growing views that nearly five years of ultra-loose monetary policy from the Fed was likely to begin reversing sometime this year. The about-face of the Market Vectors Gold Miners ETF (GDX | A-54) was even more dramatic than GLD’s. The fund catapulted 10 percent higher to $28.52. Even after today’s gains, it’s still 40 percent lower this year.

In recent months, many asset classes that had been rising because of the Fed’s easy-money policies suddenly reversed course after Ben Bernanke’s Fed began signaling in spring that it might well begin tapering its quantitative easing sometime this year. In particular, that pullback focused heavily on government bonds, gold and as noted, the developing world. It all reversed today.

“The Federal Open Market Committee referenced the fact that mortgage rates have climbed, the 10-year Treasury yield has climbed and there could be fiscal policy drags coming up with the debt-ceiling debate,” said Sumit Roy, an analyst and managing editor of HardAssetsInvestor.com.

“They want to see how all that plays out on the economy before they ultimately begin the tapering process,” he added, suggesting that once the October debt-ceiling talks are over in Washington, D.C., the Fed will have a clearer read on underlying fundamentals. The FOMC meets again in December, Roy noted.

Yields on 10-year Treasurys fell  14 basis points to 2.70 percent—off from as high as 2.98 percent at the start of the month, but sharply higher than the 2.18 percent in early summer. The long-dated iShares 20+ Year Treasury ETF (TLT | A-78) jumped 1.5 percent in price to $105.32.

Broad-based equities strategies also benefited from the central bank’s unexpected decision, with the SPDR S&P 500 ETF (SPY | A-99) rising 1.25 percent to $173.30—a record.

Broad emerging markets equities strategies, such as the Vanguard FTSE Emerging Markets ETF (VWO |A-86) rose even more sharply. VWO added 3.5 percent, reaching $42.76 a share.

Re-Emerging Emerging Markets

That pop in emerging markets assets extended to a host of individual country funds, including those that were affected so much on the way down after the Fed had signaled it might be starting to reverse course on its bond-buying program.

For example, the iShares MSCI Poland Investable ETF (EPOL | B-94) shot up almost 6 percent to $29.53 a share. Polish equities have been on a tear in recent years, in part because Poland has begun to successfully reinvent its economy, pushing into high-tech sectors.

Also, the iShares MSCI Indonesia Investable Market ETF (EIDO | B-98) added upward of 8 percent, reaching $27.32 a share.

“We pay close attention to what happens in those countries, as it affects the United States,” Bernanke said during his press conference, in response to a question on whether low U.S. interest rates were hurting developing market economies.

The Fed chairman said U.S. interest rate policy, in the final analysis, is meant to help the U.S. economy, and the health of the U.S. economy is crucial to other countries, particularly those in the emerging markets.

 

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