The Fed Has Investors Running For Cover

Equities and government bonds came under fresh pressure at the end of last week .This development continues this morning as Asian shares fell to a 9-and-a-half month low. Investors worried about China's economic and financial stability simultaneously try to adjust to the prospect of diminishing Federal Reserve support. The Asian Pacific MSCI-index slipped to its lowest level since last September, posting a drop of 4.5 % only last week. The U.S. index suffered its biggest weekly decline in one year.

Global markets are fragile, experiencing dramatic falls for securities with emerging markets hit especially hard. The U.S. Federal Reserve’s (FED) statement last Wednesday, highlights what little tolerance there is to a shift in policy. U.S. government bond prices suffered In addition to the steep fall in equities. The yield on the 10-year treasury rose 8 basis points to 2.5 %, the highest level since 2011. The German Bond yield rose on Friday to 1.73 % after Bernanke stated that the Fed was preparing for a scale back (tapering) of its monthly asset buying of USD 85 billion a month, toterminate this program in the first half of 2014.

The latest rise in treasury yields added impetus to the dollar, which was the big winner last week. The EUR/USD continues to fall and trades at 1.3109 in early Asian trade with USD/JPY at 97.66. In China, money mark rates remained volatile keeping investors in a jittery state about Chinese authorities intentions. The recent spike in market rates compounds fears of a sharper than expected slowdown in the Chinese economy. Chinese shares led by the banks continue their downward spiral.

Commodities, with precious metals in particular, were hardest hit by the market volatility. Gold returned to 2010 levels after dropping below USD 1300, trading at 1285. Gold is now more than 30 % below the nominal all-time high of USD 1921. Silver prices fell 8.5 % below USD 20 an ounce. The euro lost 1.7 % in relation to dollar last week. Euro short positions were, however, aggressively cut, suggesting that traders expect a quick correction. The steep fall seen in the Australian Dollar, which, since March, has lost 17 % against the common currency, might also indicate a rebound.