Bernanke Sparks Stocks, Bonds And Gold ETFs Sell Off


Exchange traded funds tracking bonds, the major stock market  indexes and gold tumbled while agricultural commodities jumped after Federal Reserve Chairman Ben Bernanke said that the Fed hopes to taper its economic stimulus program this fall and end it by mid 2014. At that point, the unemployment rate is seen dropping to 7%.

Bernanke's remarks Wednesday followed the Federal Open Market Committee's (FOMC) vow of sticking with the status quo for now.

The FOMC indicated that the Fed would keep buying $85 billion a month in bonds and keep short-term interest rates near zero as long as the unemployment rate, 7.6%, stays above 6.5% and projected inflation stays below 2.5%.

SPDR S&P 500 ( SPY ), the largest ETF by assets, dropped 1.37% to 163.46. Sectors most sensitive to interest rates -- real estate ( REZ ) and utilities ( XLU ) -- sold off most, tumbling 3.09% and 2.29%, respectively.

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, plunged 1.86% to 59.96.

IShares MSCI Emerging Markets Index ( EEM ) crashed 3.15% to 38.58, an 11-month low.

IShares Barclays 7-10Year Treasury (IEF)skidded 1.37% to 103.59, a 14-month low. Yields on benchmark 10-year bonds popped 13 basis points to 2.32% -- a 15-month high.

PowerShares DB US Dollar Index Bullish (UUP) surged 0.91%, snapping a four-week losing streak.SPDR Gold Shares (GLD) fell 1.17% to 130.59 -- its lowest price in more than two years.

Pressure On Bonds

"The Fed is definitely going to slow its purchases of bonds," Brian Frank, manager of $18.4 million Frank Value , in New York City, said in an email. "Naturally, this will put pressure on the bond market, so the smart thing to do is front-run the Fed and sell before they do."

Equity investors see rising interest rates as "less juice for the economy, which is going to pressure corporate earnings," said Ethan Anderson, chief investment strategist of Rehmann Financial, with $1.5 billion in assets under management. "Higher interest rates are anti-inflationary, knocking down gold investors."

The Federal Reserve lifted its projections for economic growth and unemployment while lowering views on inflation. It expects 2013 gross domestic product growth of 2.3% to 2.6% vs. 2.3% to 2.8% in March. It sees 2014 GDP expansion of 3.0% to 3.5% vs. 2.9% to 3.4% in March.The market is too pessimistic about when the Fed will taper bond purchases and lift interest rates, according to Credit Suisse analysts. They see weak global growth -- especially in China -- weighing on the U.S. They expect developed market central banks will likely continue stimulating their economies by buying assets.

"GDP growth above 2.5% will be required to drive down the unemployment rate," Credit Suisse analysts wrote in a client note. "The 6.5% unemployment rate threshold will not be breached until mid-2015."

Paul Edelstein, U.S. economist at IHS Global Insight, headquartered in Englewood, Colo., believes the Fed is too optimistic, and doubts that the unemployment rate will fall below 7.5% this year.

"Bernanke stressed that this road map is entirely contingent on the Fed's forecasts being correct," Edelstein said in a statement. "So we question whether the Fed will end up tapering before 2014."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: EEM , EFA , REZ , SPY , XLU

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