Fears over future of QE spook global investors

Tim Wallace
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MARKETS plunged yesterday as investors panicked that money printing is coming to an end before global growth is fully back on track.

Shares, bonds and commodities all saw big sell-offs across the UK, Europe, US and Asia with investors favouring cash instead of other assets.

The sudden fall in confidence could even prompt the US Fed to take further action on easing next week to reassure the nervous markets.

In Britain the FTSE 100 fell below 6,300 for the first time since April, before recovering slightly to end the day down 0.94 per cent at 6,340.

US government bonds were hit by the sell off, pushing up yields on the instruments. Real yields on 10-year Treasuries turned positive for the first time in 18 months, after hovering around the minus 0.6 per cent level for most of this year so far.

The sudden rise since the start of May indicates the scale of markets’ reliance on quantitative easing – even the discussion of tapering, or slowing the pace of debt purchases, has worried investors.

At the other end of the debt market instruments also saw falls – Barclays’ high yield bond exchange traded fund dipped 0.72 per cent on the day.

The dip indicates the fall in Treasury prices was not just a move from safe havens towards riskier investments.

Emerging markets were also hit hard, with the Indian rupee slumping to an all-time intra-day low of 58.98 against the dollar and the Brazilian real hitting a four-year low, as the country’s benchmark Ibovespa stock index tumbled 2.7 per cent.

Meanwhile the dollar fell against the yen, closing in on the ¥96 mark, reversing some of the gains made since the Bank of Japan announced a major new wave of money printing.

The fall in markets spread to Europe where Spanish 10-year bond yields increased to 4.66 per cent, equalling a six-week high, while shares on the EuroStoxx 50 dipped 1.33 per cent.

Commodities too suffered with gold down 0.72 per cent, silver down 1.32 per cent and oil down 0.92 per cent.

The widespread fall in global markets could lead the Fed to row back on plans to slow down the pace of easing.

“With yields on 10-year Treasuries challenging the 2.3 per cent level, up almost 0.7 percentage points from their recent low, this must be raising concerns at the Fed, especially as mortgage yields are rising in lock-step,” said ING’s Rob Carnell.

“We would not be at all surprised if recent market moves prompt some moderating comment from Ben Bernanke over coming days and weeks ... growth is still fairly narrowly based, and will be sensitive to abrupt rises in borrowing costs.”