The Fed’s statement hinting about a possible tapering of its asset purchase program has plunged the global markets in a chaos. The emerging economies were the most affected as they bore the brunt of the markets’ reaction to the uncertainties surrounding the Fed’s remarks of an early QE pullback. Among these emerging economies, the two Asian powerhouses, China and more importantly India, severely felt the aftershocks of the Fed’s QE remarks.

China, the biggest Asian economy, was faced with a credit squeeze problem last week coupled with a possible slowdown in the industrial production. The People’s Bank of China (PBOC), its central bank, cracked down on the currency speculation by its banks using foreign capital inflows of US Dollar. This had created a sudden drop in the foreign exchange inflows drying up the liquidity in the economy.

On the other hand, the recent flash PMI index of HSBC read at 48.3 in June, which a clear drop from the May’s final reading of 49.2. Since both the values are below the critical mark of 50, it possibly signals at an economic contraction in China. This has alarmed markets all over the world with even the US stock market posting a marginal decline in reaction.

Meanwhile, in India, the second Asian powerhouse, the strong appreciation in the USD had pummeled the Indian currency to record life time lows all through the last week. Even with the RBI’s intervention, India’s Central bank, the rupee plunged beyond the psychological barrier of 60 to record a low of 60.76 on Wednesday.

The Indian economy has been struggling with a steadily widening fiscal deficit with its CAD (Current Account Deficit) reading at around 6.7% in the last quarter of 2012. The RBI has been cautioning against the continued high levels of CAD with the sustainable levels being around 2.5% of the GDP.  A consistent high level of trade deficit could cause high levels of inflation in the long run. Currently, the inflation in the Indian economy reads at 4.7%according to its WPI (wholesale Price Index) reports.

This financial turmoil in the two Asian powerhouses has put the global commodities market on the back foot. This is especially true for Crude and Bullion, as they struggle to cope with the sudden rise in the U.S. dollar and the fears of a possible tightening in global liquidity. According to the latest reports, crude is trading around $94.42 after a declining by $0.90, with the Brent crude struggling to stay above its psychological mark of $100, as it trades around $100.68.

Gold on the other hand has been declining continuously all through last week. The bullion is trading at a 3 year low with the Spot gold down by $48.30 to trade at $1,229.75. China and India being the two biggest Asian economies, account for all the major demand from the emerging economies for Gold and Crude. Even with a positive outlook of the U.S. economy and a rising USD the Crude prices are slipping as the demand from China, one the biggest consumers is slowing down due to fears of an economic contraction.

Meanwhile, India struggling with a steadily weakening currency is fraught with widening fiscal deficit fears. This has eroded the biggest demand support for Gold from its biggest retail markets in India and China, causing bullion’s free fall since last week.

However, this Tuesday the PBOC relented from its hawkish stance and stated that it will continue to lend money to banks facing a credit crunch, if they intend to invest in the real economy instead of speculation. Also, the latest last quarter GDP reports suggest that the U.S. economy grew only by a mere 1.8%, bellying the Fed’s expectation of a 2.4% growth.

This definitely allays the fears of a possible early tapering of Fed’s easing policy, putting to rest an impending liquidity crisis in the Asian and emerging economies. With Chinese credit crunch too being alleviated by its central bank there is hope for a good performance by these two Asian powerhouses. This will probably spill over to the global markets, bringing back the rise in demand for Gold and Crude.

Note: This blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.