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Charts & Analysis

FedEx Takes the Rupee 6-0, Nifty Below 200DMA

The Federal Reserve has decided to Exit the Stimulus it has been giving the US economy by purchasing bonds worth $85 billion each month. The Fed Exit (“FedEx”?) will be tapered down later this year and further purchases will be completely stopped by mid-2014.

Bloomberg:

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said, referring to the FOMC’s outlook for “moderate” economic growth, further labor-market gains and inflation accelerating toward the Fed’s 2 percent goal.

If such gains are maintained, “we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he said. A “strong majority” on the FOMC now expects it won’t sell mortgage-backed securities as part of their exit strategy.

The result: The rupee goes to Rs. 60 to a dollar. Indian markets are down 3%. Nearly every world market is down 2%. Indian banks are down nearly 4%.

This, on the back of the Fed saying it *might* cut purchases.

We are now in the enviable position of having had a crisis, and the world’s largest bond purchase program to help get out of that crisis, and then just the THOUGHT of no longer buying any more is triggering a panic?

Note that it’s not a crisis situation. 2-3% moves are nothing great, though the fear is that now, we’ve fallen 8-9% from the highs, and are just 10% off the all time high. Our P/E (standalone, I agree) is still 17.

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On the downside, we have broken down below the 200 DMA again and are now 3% below it. Stocks that were supported largely by banks are now breaking down because the Bank Nifty is in really bad shape, having fallen 20% off the peaks of 13,200.

Does the Fed move hurt that much? How do bond purchases by the Fed even impact us? Here’s the theory: The fed buys bonds in large quantities, printing money. That takes bonds off the books of banks, who now have money to lend. They lend some, they invest some. The money finds its way into investors’ hands, who them pump money all around the globe. India gets some of it. And when they stop, we don’t get it, and there’s no replacement for this “FII” money.

Another way: when bond purchases stop, the bond yields go up. Indeed the 10 year bond yield in the US is now over 2%, having been at 1.5% recently. The drop in bond prices (which go inversely with yields) drives people out of bonds. And to take those losses, investors exit bond positions everywhere else. In India, they have supposedly gotten out of about $5bn worth of bonds.

Eventually, when foreigners exit, the rupee drops. And the rupee hit the 60 mark in intraday trading today:

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The good part: Calculated Risk tells us that it’s not like the US will stop buying bonds tomorrow. It is only likely to, if the broad economic data tells it that a recovery is in place. And for that the US GDP needs to grow at nearly 3% for the next six months, unemployment would have to drop another 0.4% and inflation should be closer to the 2% the Fed expects. This is so that the Fed tapers in September, so it’s likely we will miss that and go to December instead (for the taper, which is more or less a definite thing, so it’s when, not if).

Samir Arora says we’re bullshitting ourselves that this will make any difference. We all knew the taper was going to happen, he says, so what’s new? The answer: We all knew QE3 was coming, more or less, and when it happened it still changed market dynamics. This market is about emotions.

Ben and Janet say it like they’re surprised that we’re surprised: Really?

My take: It doesn’t matter. I was long when it went up. I exited most positions at a stop loss, five profitable exits and 2 unprofitable ones. I’m now short. All this about sentiment, it shows in the price: the Nifty was down 6% from it’s recent high before it fell 3% today. The Dollar fell just 2% today but 8% from the 55 levels about two months ago. The price was talking before Bernanke was talking.

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