Date: 2013-08-25
Things to think about as the Fed discusses the tapering
- Will the Fed cut down on its monthly purchases in September?
Nobody can be sure, but everybody knows that the Fed cares about the US economy and the financial market. It is as if the S&P performance became the Fed's KPI, even though this may not be the case. Immediately, inflation does not appear as a serious concern; it had better not be.
- What is the impact of Fed's tapering on the market?
It's easy to call it a negative factor, but it will be considered as a neutral factor in the medium term, in fact.
- How is the market positioned before a possible announcement of tapering?
Technically, the US equity market is at the point where a rebound or a significant drop is due, more so for the former. Use of credit is an issue, but the Fed is well aware of this. S&P is at the level where it won't be weird if the market rises if the Fed announces a tapering smaller than, say, USD 20B monthly.
- How can this event be turned into a profitable trade?
It is not the worst time to add some high beta US stocks, especially (if they appear to be) on the way up. It's probably a good idea to focus on the US listed stocks with domestic exposure, other things being equal. Even if there is tapering, the US equities are likely to do better than the EM ones, currency factor counted. For this reason, a good time to observe any EM markets with excessive volatility should soon be coming, if not already here.
- UST...?
Was the recent spike a beginning of the collapse of UST? I don't think so. Despite the short term concerns due to the theoretical-domestic supply/ demand dynamics, UST is likely to benefit from the worries from overseas in the medium term, if the tapering starts, even though it is true that the main actor in the UST has been the Fed, not the foreigners. The Fed probably won't cut down too much on its bond purchases, because a serious damage on the UST market, which is closely related to the US's fiscal issue, is still a possibility. This time, foreign holding of UST may or may not rise; this is something interesting to observe, if I can.