The taper that wasn’t a taper is seeing European stocks rally. Here’s why
It's a taper, but not as we know it.
Ishaq Siddiqi, market strategist at ETX Capital, says that the decision has removed much of the volatility that we've been seeing in the final quarter of this year, and gears us up "for a delayed but eagerly anticipated “Santa Rally” to finish this year in a bang and kick of the next year in an upbeat fashion".
There were two big surprises from last night's Federal Reserve announcement.
Tapering starts early
The Federal Reserve's asset purchases will be reduced from January. A Reuters poll of economists saw only 12 of 60 predict that the Federal Open Market Committee (FOMC) would make the call so early.
Normally we'd expected an unexpected announcement of QE reduction to see equities fall, but the Dow Jones closed up by 1.8 per cent.
But the pace will be slow
Asset purchases are only being reduced by $10bn, from $85bn to $75bn. That's a snail's pace, and one that markets have likely brought upon themselves. The prospect of a reduction in Fed asset purchases resulted in huge volatility in markets over the Summer.
The Fed probably didn't want to incite those fears when it actually did decide to reduce QE. Berenberg's Christian Schulz has called the decision a "baby step".
While the beginning of tapering was expected later, this slow pace means that QE will probably be around for longer. Societe Generale's Kit Juckes says that if asset purchases continue to be reduced at this rate, then they won't finish "until very late in 2014."
Investors agree with Federal Reserve chairman Ben Bernanke – that the Fed is "not doing less" by tapering.