Taper Fears Continue To Spook Investors

Stocks continued their retreat for a third day on Wednesday, as fears began to intensify over the possibility that the Fed might begin to taper its bond-buying program as early as September. Investors focused their attention on the dozens of articles published in the wake of a Tuesday breakfast meeting with reporters, held by Chicago Fed President and FOMC member, Charles Evans. After noting that it is “quite likely” that the tapering effort would begin “later this year”, Evans would not rule out the possibility that the FOMC would decide to trigger the taper at its September meeting. Quantitative easing fans were particularly startled by the remark by Evans that the FOMC did not need to wait for one of its scheduled monetary policy meetings in order to announce the taper.

What shocked QE fans was the fact that Evans is considered a monetary policy “dove”, since he created the so-called “Evans rule”, which holds the federal funds rate near zero until the unemployment rate drops to 6.5 percent and the inflation rate rises above 2.0 percent.

The Dow Jones Industrial Average (DIA) lost 48 points to finish Wednesday’s trading session at 15,740 for a 0.31 percent decline. The S&P 500 (SPY) dropped 0.38 percent to close at 1,690.

The Nasdaq 100 (QQQ) slipped 0.11 percent to finish at 3,118. The Russell 2000 (IWM) fell 0.74 percent to end the day at 1,044.

In other major markets, oil (USO) fell 1.20 percent to close at $37.01.

On London’s ICE Futures Europe Exchange, September futures for Brent crude oil declined by $1.08 (1.01 percent) to $106.02/bbl. (BNO).

December gold futures advanced by $3.90 (0.30 percent) to $1,286.40 per ounce (GLD).

Transports stalled out during Wednesday’s session, with the Dow Jones Transportation Average (IYT) falling 0.76 percent.

In Japan, stocks sank as the yen strengthened to 97.05 per dollar just before Wednesday’s closing bell in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). Exporters led Wednesday’s swoon with Toyota falling 2.4 percent. The Nikkei 225 Stock Average took a 4 percent nosedive to 13,824 (EWJ).

In China, stocks declined as anxiety intensified in anticipation of a downbeat trade balance report due on Thursday, which is expected to show that the nation’s exports increased less than expected. The Shanghai Composite Index declined 0.67 percent to close at 2,046 (FXI). Hong Kong’s Hang Seng Index sank 1.53 percent to finish the session at 21,588 (EWH).

European Stocks had another tough day on Wednesday after investors were reminded that the region is undergoing a painfully slow economic recovery, which has yet to achieve “escape velocity” as Mark Carney noted (NYSERACA:VGK).

No taper for England was the order of the day after Bank of England Governor Mark Carney emphasized that the central bank will not taper back its bond purchases or raise interest rates until the unemployment rate falls below 7 percent, obviously taking a page from Ben Bernanke’s playbook. Beyond that, Mr. Carney offered a bit of the old forward guidance with the remark that interest rates were not likely to rise within the next three years, adding “though they could”. The nation’s unemployment rate is currently 7.8 percent. Surprisingly, Carney’s remarks sank stock prices in London, with the FTSE 100 falling 1.41 percent (EWU). On the other hand, in the States that sort of talk from a Federal Reserve Board member would spark a rally.

The Euro STOXX 50 Index finished Wednesday’s session with a 0.13 percent advance to 2,794 – remaining above its 50-day moving average of 2,689. Its Relative Strength Index is 64.37 (FEZ).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,650 after finishing Wednesday’s session with a 0.38 percent drop to 1,690 At this point, bears are hoping to see the formation of a head-and-shoulders pattern on the S&P chart. Its Relative Strength Index fell from 61.54 to 57.51. After edging above the signal line, the MACD has dropped back down below it, suggesting a continued decline.

For Wednesday, three sectors managed to finish the session in positive territory. The utilities sector led the group, with a 0.46 percent advance. The consumer discretionary sector took the hardest hit, falling 0.88 percent.

Consumer Discretionary (XLY): -0.88%

Technology: (XLK): -0.25%

Industrials (XLI): -0.15%

Materials: (XLB): +0.04%

Energy (XLE): -0.35%

Financials: (XLF): -0.68%

Utilities (XLU): +0.46%

Health Care: (XLV): +0.08%

Consumer Staples (XLP): -0.48%

Bottom line: Wednesday’s stock market activity demonstrated the stark difference between the way the British and Americans view central bank intervention. After Bank of England Governor Mark Carney announced that the BOE would stick with its bond buying and low interest rates, the FTSE 100 sank 1.4 percent. In the States, FOMC member Charles Evans noted that the FOMC does not have to wait for one of its monetary policy meetings to announce the taper of its bond-buying and stocks fell.

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