Months of speculation and worry have finally come to an end. The Fed finally announced its long-awaited plan to scale back its bond-buying scheme, known as quantitative easing, that was designed to inject liquidity into financial markets. With lending freed up and money flowing, the Fed will begin to taper its bond buying program. Asian markets have become semi-dependent on cheap capital, however, and many analysts have worried that tapering could cause turmoil in Asian markets.
Fed’s Q.E. program helped the market become cheap
Quantitative easing is essentially the electronic creation of money. The program is designed to increase liquidity. Generally speaking, the more money available in the market, the more easily money flows. Through the Fed’s Q.E. program, the government essentially created money and then bought bonds, which increased the money supply and helped make credit cheap.
When the United States launched its bond buying program, a significant portion of that money flowed abroad, making countries across the world dependent on the U.S. stimulus package. Asian companies were able to access cheap capital to fuel investments, and Western investors looking for higher returns than available in the United States were keen to invest money in the region. The U.S. stimulus package thus became an important component of the economic boom Asia has enjoyed over the last few years.
Asian stock markets’ fear of tapering
With the program set to be slowly reduced – a process called tapering – there were fears that Asian stock markets would react poorly. Indeed, rumors of tapering have previously depressed stock markets across the region. Now, however, it appears that the transparency and long warning time of the Fed’s decisions have allowed investors to react slowly over time.
Instead of reacting poorly, stock markets across Asia, and also the United States, actually recorded gains. The long-awaited announcement was met more with a sense of relief than anything else. The Nikkei 225 recorded gains of nearly 1.75%, while the Jakarta Exchange saw a .85% bump. The Kaual Lumpur stock exchange lost a few points while the Singapore Straits Time Index gained a few points.
Asian investors confident in stable growth
With worries over tapering out of the way, companies can get back to focusing on doing business. While tapering may restrain growth, the rapid rise in consumer incomes and generally strong public finances have placed many Asian countries in a position to record stable growth. Of course, issues could always arise down the road, but for now Asian investors appear to be confident in growth and opportunity prospects.
Whether or not the pullback will stick remains to be seen. The United States has tried tapering its fiscal stimulus program before, but negative reactions from markets forced the Fed to stop its tapering efforts. If unemployment starts to tick up or markets start to head south, the Fed could reconsider its stance. For now both Bernanke and his successor Janet Yellen seem set on reducing U.S. stimulus efforts, but this should not lead to major market instability.