Will the Fed start its famed taper in September?

 
64% of 800 investors polled think it will start this week but weak US data suggest it might not be aggressive.
Two big events this week - the Federal Open Market Committee (FOMC) meeting on Wednesday and RBI's policy review on Friday - will determine which way equity markets head.
Since June, the Federal Reserve has been looking to taper its $85 billion a month bond buying programme. The FOMC's meeting is crucial for emerging markets like India because over the last few years, financial markets have been fuelled by easy liquidity.

Since 2009, $100 billion has flowed into Indian equities. Not surprising, then, that the talk of a possible taper from this month has sent risk assets and commodities into a tailspin.
So, are the taper related fears unfounded or are they real? To begin with, markets have already priced in some tapering from this month. However, if the Fed tapers its bond buying by $10 billion, the impact on financial markets would be negligible.
But if it is higher than $10 billion, markets may roil. According to a Barclays survey, conducted among 800 global investors, 64 per cent of respondents believe tapering will start this week and almost all of them expect it to occur before the end of the year.

Investors now perceive the removal of Fed stimulus will start earlier, the survey says. Forty five per cent expect the Fed to finish their open-ended QE3 programme in second quarter of 2014, while most respondents in our June survey thought it would happen in the fourth quarter of 2014 or later.

Interestingly, most investors believe equities have become less attractive but have shown a slight increase in their preference for emerging markets and commodities from June.

Barclays says: "The perception of key risks has also shifted. Last quarter, a reduction in Fed policy stimulus was seen as the key risk for markets by nearly 40 per cent of survey participants; today, the number is just 26 per cent."
Several economists in the US believe concerns regarding a taper could be premature, as growth data continues to be weak and the Fed does not want "risk off" trades just yet.
Talks of a taper have pushed up interest rates in the US by over 100 basis points and any further increase would impact growth. For starters, it is believed growth has slowed in the third quarter (ended September) from the 2.5 per cent seen in the second quarter. Economic growth bottomed out in the fourth quarter of 2012 when it touched 0.1 per cent. While there is no doubt that growth is picking up, questions remain on how sustainable this would be without the stimulus.

Since the Fed met at the end of July, there have been 21 growth-related data releases. Of the 21 releases, 12 have been below consensus.

New home sales in the US in the month of July have fallen by 13.4 per cent. Bank of America Merrill Lynch says it's a close call but it is still in the December camp when it comes to the Fed's possible tapering.

Gold falls below $1,300 as Fed stimulus decision looms

Singapore: Gold extended losses into a third session on Wednesday, falling over 1 percent to trade below USD 1,300 an ounce, with investors expecting the US Federal Reserve to announce a reduction in its bullion-friendly stimulus measures.

The Fed is expected to begin its long retreat from ultra-easy monetary policy by announcing a small reduction to its USD 85 billion monthly bond purchases following a two-day policy meeting that ends on Wednesday. Many expect a USD 10 billion cut.

Spot gold had fallen 1.2 percent to USD 1,293.69 an ounce by 0217 GMT, bringing the year's losses to 23 percent. It had earlier dropped to USD 1,291.34 - its lowest since August 8.

"It all dependent now on the FOMC," said a precious metals trader in Hong Kong, referring to the Federal Open Market Committee. "It depends on what the language is going to be on their stimulus and what sort of tapering they pursue."

"Gold is still technically under pressure and will probably struggle to go above USD 1,350 again."

Traders said prices would find their next support level at USD 1,270- USD 1,280 an ounce.

Gold, often seen as a hedge against inflation and a slowing economy, benefited when central banks around the world launched stimulus measures to support their economies. The metal hit an all-time high of about $1,920 an ounce in 2011.

But this year several analysts have cut their forecasts for gold prices in anticipation of the US central bank curbing its stimulus measures. Goldman Sachs expects prices to drop to USD 1,050 by the end of next year.

PHYSICAL DEMAND

Due to the volatility in prices, physical demand has failed to pick up rapidly in key consumers India and China. Expectations that prices could fall further once the Fed announces a cut in stimulus have also restrained purchases.

Shanghai gold futures fell 2 percent on Wednesday.

Top gold consumer India increased its import duty on gold jewellery to 15 percent from 10 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry.

The Indian central bank and finance ministry have taken several steps this year to curb bullion imports in an effort to reduce the country's record trade deficit.

Silver and palladium dropped about 1.6 percent, while platinum fell nearly 1 percent.