Taper Talk Takes Its Toll On Stocks

The dreaded taper of the Federal Reserve’s bond-buying program sent stocks moderately into the red on Friday. A number of reports suggested that during the past week, ETFs experienced a total of over $1 billion in outflows as investors worried about the consequences of cutbacks to quantitative easing. Dallas FedHead Dennis Lockhart drew media attention on Friday, as the latest non-voting Federal Reserve officer to speak out in favor of a September taper, joining the chorus with other non-FOMC voters Richard Fisher of Dallas and Sandra Pianalto of Cleveland.

Taperphobia was amped-up on Wednesday, as investors focused on a number 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 process 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 need not wait for one of its scheduled monetary policy meetings in order to announce the taper. The threat of a “spontaneous taper” helped raise the fear factor.

The Chicago Board Options Exchange Volatility Index (VIX), also known as the “fear index”, jumped 5.34 percent on Friday in accordance with its newfound role as the “Taperometer” (since it has been measuring investor fear that the Fed will taper its bond-buying in September).

The Dow Jones Industrial Average (DIA) lost 72 points to finish Friday’s trading session at 15,425 for a 0.47 percent decline. The S&P 500 (SPY) declined 0.36 percent to close at 1,691.

The Nasdaq 100 (QQQ) dropped 0.37 percent to finish at 3,118. The Russell 2000 (IWM) dipped 0.10 percent to end the day at 1,048.

In other major markets, oil (USO) skyrocketed 2.04 percent to close at $37.59.

On London’s ICE Futures Europe Exchange, September futures for Brent crude oil advanced by $1.47 (1.40 percent) to $106.83/bbl. (BNO).

December gold futures advanced by $3.60 (0.27 percent) to $1,313.50 per ounce (GLD).

Transports got stuck in traffic during Friday’s session, with the Dow Jones Transportation Average (IYT) dropping 0.61 percent.

In Japan, stocks made a slight advance as the yen bounced around near 96.66 per dollar and non-ferrous metal producers had a good day. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average advanced 0.07 percent to 13,615 (EWJ).

In China, stocks managed to finish Friday’s trading session with an advance, despite a midday slump. The National Bureau of Statistics reported that the nation’s industrial production increased by 9.7 percent on a year-over-year basis, beating expectations of an 8.9 percent increase (which was why oil prices advanced on Friday). Consumer prices increased at a 2.7 percent annual rate, falling short of the government’s 3.5 percent target. Retail sales increased at a 13.2 percent annual rate in July, missing expectations of a 13.5 percent increase. The Shanghai Composite Index advanced 0.36 percent to close at 2,052 (FXI). Hong Kong’s Hang Seng Index surged 0.70 percent to finish the session at 21,807 (EWH).

On Friday, all eighteen western European stock markets saw their benchmark indices advance. China’s better-than-expected report on industrial production followed Thursday’s upbeat trade balance report from China, giving European investors more hope for the global economic recovery (VGK).

The Euro STOXX 50 Index finished Friday’s session with a 0.31 percent advance to 2,825 – climbing further above its 50-day moving average of 2,691. Its Relative Strength Index is 68.98 (FEZ).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,652 despite finishing Friday’s session with a 0.36 percent decline to 1,691. 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 dropped from 60.35 to 56.59. The MACD is below the signal line and both are on a downward trajectory, suggesting a continued decline.

For Friday, all sectors were in negative territory except for the materials sector, which climbed 0.58 percent. The utilities sector took the hardest hit, falling 0.69 percent.

Consumer Discretionary (XLY): -0.22%

Technology: (XLK): -0.51%

Industrials (XLI): -0.33%

Materials: (XLB): +0.58%

Energy (XLE): -0.30%

Financials: (XLF): -0.34%

Utilities (XLU): -0.69%

Health Care: (XLV): -0.35%

Consumer Staples (XLP): -0.43%

Bottom line: Investor fears concerning the possibility that the Federal Reserve could begin to implement the dreaded taper of its bond-buying program in September sent the major stock indices moderately into the red on Friday.

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