Investors Dump Stocks For Bonds, Gold After Fed Taper


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Investors unloaded stocks across the board Wednesday while snatching up bonds and gold after the Federal Reserve reduced its monthly bond-buying spree by $10 billion despite signs of weakness in the U.S. economy and turmoil in emerging market currencies.

As was widely anticipated, the Fed tapered its bond purchases from $75 billion a month to $65 billion a month ($30 billion in mortgage-backed securities and $35 billion in Treasuries).

Vanguard FTSE Emerging Markets ( VWO ) -- the largest ETF of its kind by assets -- led the sell-off among major broad stock-market indexes. It plunged 1.8% to a five-month low of 37.29 in heavy volume. It's tumbled 8% year to date and 16% in the past 12 months.

The Fed made no mention of the recent sell-off in emerging market currencies in its statement, which surprised experts. Turkey's central bank has doubled interest rates to support the free-falling lira. Argentina, India and South Africa also raised interest rates this week to strengthen their currencies.

"We are quite sure the Fed is monitoring the situation, but (it) probably did not want to exacerbate an already fragile situation by signaling a sense of worry," Dana Saporta, a U.S. economist at Credit Suisse, wrote in a client note.

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, fell 1.1% to a one-month low of 64.40. SPDR S&P 500 ( SPY ) dropped 1% to a six-week low of 177.35.

"The Fed's pathway to unwinding its current policy is still unclear to the market," said Lindsey Piegza, chief economist at Sterne Agee.

Janet Yellen's replacing Ben Bernanke at the helm of the Federal Reserve has added an extra unknown. Volatility in emerging markets should be expected, Piegza said, as they were the biggest beneficiaries of quantitative easing when it started in 2009.

"We expect markets will eventually start pricing in a bit more tightening in 2015 and 2016 than is being signaled by Fed officials, putting more upward pressure on bond yields," Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., said in an email. "For now, though, markets are, if anything, pricing in less tightening than suggested by the Fed's forward guidance."

The Fed's announcement comes at a time when fierce Arctic weather sweeping across the U.S. and plunging emerging market currencies incite uncertainty in global stock markets , prompting investors to seek safe-haven assets.

Fleeing For Safety

" Investors are fleeing for safety, and the safest things they see on a global basis are U.S. Treasuries," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management with $115 billion in assets under management.

He doubts interest rates will rise further and recommends investors buy actively managed portfolios of emerging-market, high-yield corporate and municipal bonds, owing to their attractive yields resulting from the recent sell-off.

Yields on benchmark 10-year Treasury notes fell 7 basis points to 2.68%. Thirty-year Treasury yields fell 6 basis points to 3.62%.

Gold prices rose 1% to $1,269 an ounce.SPDR Gold Shares ( GLD ) -- the largest ETF backed by gold bullion -- rose 1.3% to 122.47 in heavy volume. It broke above key technical resistance at its 50-day moving average, indicating short-term strength. It's advanced 5% year to date, but still trades below its long-term 200-day moving average, indicative of a long-term downtrend.

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

This article appears in: Investing ETFs
Referenced Stocks: EFA , GLD , SPY , VWO

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