Last week, Bernanke’s statement after the two day long FOMC meeting hinted about the possibility of an early wind-up in the Fed’s bond purchase program. He mentioned that if the US economy continues to show improvement then Federal Reserve may start paring back its monetary stimulus by later this year and completely wind-up by mid of 2014. This possibility of the Fed completely stopping its easy money wreaked havoc on global markets last week.

Moreover, the markets seem to be still reeling under the effect of last week’s Fed’s easing bombshell. Major commodities like bullion, crude, and currencies of emerging economies seem to be struggling to buck the downtrend caused by the strong rise in the greenback. The US Dollar, immensely strengthened by the Fed’s positive outlook, rallied against a basket of major currencies to post one of its biggest weekly gains of 2.2% since November 2011.

The rising greenback seems to be relentlessly pummeling all major trading currencies. The currencies of emerging economies were the worst hit, with Indian currency further declining to a new record low of 59.98 against USD from its previous life time low of 58.98. Other major currencies like Euro declined by 0.2% though the positive German business data tempered the slide.

Bullion that had plunged into a bearish trend seems to be poised for more declines with the Gold futures dropping by 6.9% last week, the lowest since April this year. Most speculators reduced their gold futures position by 29%. With the current downtrend, Societe Generale and Credit Suisse expect the gold prices to plummet to prices of $1200 to $1100 in another 12 months.

Meanwhile, Crude continued to decline amid the downward pressure from the rising USD and the fears of a credit crunch in China due to change in its central bank policy. Also, the HSBC Flash PMI index on June 20 read at low of 48.3. This signaled a contraction in the Chinese economic growth as the May final PMI reading stood only at 49.2, with only a reading above the critical mark 50 signaling expansion. This raised the fears of a reduction in Chinese oil consumption that further pressured the Brent crude to decline below the critical $100 mark, far below its 100 day moving average.

The US stock market, which had initially gained after the FOMC statement, turned around to post big losses by the weekend. The Fed’s paring back of bond purchase raised fears of tightening in liquidity, which pulled down the S&P Index that posted its worst decline in last two months. The S&P 500 dropped for last four sessions to post a 5% slump. Experts claim that this drop was below its 100 day moving average and the critical 50 day moving average, signaling a clear downtrend.

Thus, the fears of an end to Fed’s bond purchase spread like wildfire bringing down major global commodities markets and currencies of emerging economies. This was further fuelled by the credit squeeze perpetrated in China by its central Bank policy and its weak PMI index that signaled a possible contraction.

The market projections show that the US economy might have possibly grown by 2.4%, in line with the Fed’s expectations. The third and final reading for the US economy’s first quarter annualized GDP is due to be released next week. Since the GDP is the most prominent indicator of economic trend, if the readings prove to be in line with the Fed’s outlook, then a clear wind-up in Fed’s easing policy is very much on the cards. 

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