19 Sep 2013

Flash Update

The Fed surprised markets by delaying tapering on the basis that they would want to wait for more evidence of economic recovery. Markets responded with risk-on: USD and yields fell, equities and bonds rose. Taper sensitive assets like EM assets and high dividend stocks soared.

Their assessment of recent economic performance has improved but there is concern that the recent rise in interest rates may snuff out growth. Should the economy continue to grow over the next few weeks, the odds of tapering will rise as the Fed will believe that the economy can live with higher rates (consistent with what the market has been signaling). Bernanke did not rule out convening a press conference for the October meeting, thus making an announcement next month a likely event. While the Fed is keeping their options open, it is clear that they are more cautious on cutting back tapering, preferring to err on the side of caution.

Tapering is likely (although actual timing is uncertain) but the magnitude is likely to be small (consistent with the Fed's cautious approach). Taper sensitive assets are likely to continue their bounce in reaction to the Fed delaying their decision but our longer term outlook remains unchanged. DM assets continue to outperform while EM assets face a natural headwind when rates rise.

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