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
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 (
) -- 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 (
), tracking developed foreign markets, fell 1.1% to a one-month
low of 64.40. SPDR S&P 500 (
) 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
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
"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
, prompting investors to seek safe-haven assets.
Fleeing For Safety
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
Gold prices rose 1% to $1,269 an ounce.SPDR Gold Shares (
) -- 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