Global rout as US Fed signals end to easing

Asian stock markets fell Thursday after the US Federal Reserve said it could start scaling back its huge economic stimulus programme later this year. Ahn Young-joon / AP Photo

Global markets tumbled and Dubai and Abu Dhabi government bonds sold off after the US Federal Reserve signalled a timetable for ending its crisis-era quantitative easing policy.

The Federal Reserve raised its growth forecasts for next year and 14 out of 19 Fed officials said the first increase in Fed interest rates would come in 2015.

But the central bank said it could slow its bond-buying programme from present levels of US$85 billion per month in the second half of the year.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” the Fed chairman, Ben Bernanke, told reporters in Washington.

Stock markets fell and the dollar gained in the wake of the central bank’s announcement, with emerging markets particularly badly hit. But commodities and fixed income were also affected.

US 10-year treasuries yields rose 28 basis points following Mr Bernanke’s comments to as much as 2.46 per cent yesterday, the highest since June 2011. Fixed income across the globe weakened yesterday, with local bonds also hit.

The Dubai Government’s 10-year bonds maturing in 2021 rose 23 basis points to 4.6 per cent, and the equivalent Abu Dhabi government bonds coming due in 2019 jumped 38.5 basis points to 2.48 per cent. Bond yields move in the opposite direction to prices.

The jump in rates could mean that companies pay more to borrow, said Raza Agha, the chief economist for Middle East Africa at VTB Capital in London.

“Generally speaking, rising US benchmark rates mean that US dollar borrowing costs for much of Mena will rise,” he said. "However, once the dust settles or markets are less volatile, there should be much greater differentiation between individual issuers.”

Abu Dhabi and Dubai were still viewed positively by markets because of their strong economic fundamentals, Mr Agha added.

Dubai shares fell 1.3 per cent while Abu Dhabi’s measure retreated 0.8 per cent.

The S&P 500 fell 1.3 per cent on Wednesday night, and stocks on Wall Street opened lower yesterday after shares on Asian and European markets sank.

The MSCI Emerging Markets Index fell 3.2 per cent. Gold fell as much as $90 to lows of $1,291.65 per troy ounce, its lowest level since September 2010, while Brent crude futures slipped $2.02 to $103.75 per barrel.

“The markets were left disappointed as pricing action following the announcement saw equities, bonds and gold sell off rather aggressively in favour of the dollar,” said Gaurav Kashyap, the head of DGCX trade at Alpari Middle East, the FX brokerage.

“Bernanke maintained that existing monetary policy would continue in a bid to support the recovery and that the pace of purchases may be moderate” later in 2013.

Euro-zone output data pointed to an improvement of economic activity in the euro zone, but that provided little lift to markets after Chinese industrial data signalled deceleration in Asia’s largest economy.

In another shock to the global financial system, the Bank of England released a report yesterday morning finding a £27.1bn (Dh153.8bn) capital shortfall at five of the UK’s banks.

Among those banks requiring fresh capital, two have operations in the Middle East: Barclays, which the Bank of England said had a capital shortfall of £3bn, and Royal Bank of Scotland, which with a £13.6bn shortfall accounted for most of the fresh capital needed.