Global Macro: Fed Rattles Markets Around the World

TheStreet.com

NEW YORK (TheStreet) -- Federal Reserve Chairman Ben Bernanke provided the clarity markets wanted on Wednesday; it was just not the answer they wanted to hear.

In spite of the many reasons analysts cited about why the Fed should continue its easing measures, Bernanke stated that the bond-buying program would start to wind down later this year.

This policy choice had global ramifications. Emerging markets and sectors tied to economic growth were dependent on the low rate environment and troves of easy money flowing their way. Upon the news, these assets sold off and have continued to trend downward as the negative sentiment builds.

The first chart below is of Barclays 1-3 Year Treasury Bond Fund over Barclays 20 Year Treasury Bond Fund, a measure of the Treasury yield curve.

Long-dated Treasuries have been selling off as investors predicted that the Fed would start to wind down monetary stimulus. Although we remain in a low inflation environment and rates are expected to stay at record lows through 2015, markets are beginning to price in the long-term correction without added stimulus.

By Bernanke stating that the Fed was choosing to create less artificial demand for long-dated Treasuries, investors sold off these assets. The curve should continue to steepen for a considerable time longer on fears of inflation.

The next chart is of CurrencyShares Australian Dollar Trust over CurrencyShares Swiss Franc Trust.

The franc has been one of the least volatile currencies lately, and has provided a great currency to compare against because of its safe-haven features. The Aussie dollar, on the other hand, is a commodity-linked currency and has been hostage to news flow out of the U.S., Japan, and Australia's largest trading partner, China.

As investors question how willing central banks are to support their economies, this pair has trended downward. A stronger U.S. dollar led to weaker currency prices, which also weighed heavily on the Aussie.

Weakness out of China has similarly affected the price action. Chinese manufacturing data, released on Thursday, showed that this Chinese sector remains weak. That calls into question Chinese growth estimates and thus China's demand for raw materials.

As China continues to weaken and central banks hesitate to add more stimulus, commodity-linked currencies like the Aussie dollar will continue to underperform.

The final chart is of iShares MSCI Emerging Markets Index Fund over Total World Stock Index ETF, which measures the relative strength of emerging-market equities over a basket of world equities.

Similar to the story of the Aussie dollar, emerging markets have relied on stimulus and strong exports to developed economies.

This year, the U.S. dollar strengthened versus other world currencies, which weighed on emerging markets. A stronger dollar makes U.S. equities more attractive and pushes money out of funds tied to emerging markets.

Higher rates in the U.S. make it more difficult for emerging-market corporations and economies to borrow the funds they need to grow. It makes growth more expensive because they must borrow at higher rates over the Treasury yield.

What Bernanke chose to do on Wednesday makes sense: he is most likely leaving office beginning in 2014 and wants to shore up all of his loose ends before taking off. The U.S. economy is growing at a moderate pace and is in much better shape now than many other world economies.

The Fed chairman has done a solid job providing support to the economic recovery, but the move to eventually cut off stimulus sent shockwaves through world markets and drastically weakened assets that have relied so heavily on the easy money policies the Fed created.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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