Alroy Commentary – Relation between market and the Fed
Over the past three weeks, the world's equity and currency markets were vibrated. The Nikkei 255 index has fallen 7.32 % in a single-day; while emerging market got huge amount of net outflows. Coincidentally, money market funds recorded net inflows in the past two weeks. All the signs imply that the market shifts the attention from above countries / regions to a more familiar place - the United States.
To interpret the trends of past three weeks investment market, it is necessary to begin from the U.S. Federal Reserve’s quantitative easing policy (QE). Since financial crisis (2008), the U.S. government started bond buying program to stimulate economic recovery, however, the market has gradually become addicted to the QE. The U.S. government cannot endlessly printing money, quantitative easing program would complete its purpose one day.
Earlier this year, the United States got some good results in wide range of economic data in a wide range of economic data recorded good results, which prompted the Federal Reserve to consider the timing to taper bond purchases. In order to avoid the news slowed economic recovery, the Fed took a more tactful way. They sent the message to market unofficially, let the market have enough time to digest and adapt the change, thereby reducing the impact on the market. While the market widely accepted this message, it was a good timing for the Fed to exit.
Therefore, we have increased the cash level and sold emerging market funds in the portfolio in response to the global economic circumstances. Of course, we will keep paying great attention to the U.S. government's actions in order to make more appropriate arrangements.
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