LONDON — Financial markets were roiled Thursday by a clear signal from U.S. Federal Reserve Chairman Ben Bernanke that the central bank may be done with its monetary stimulus program by next year. While stocks and commodities took a pounding on the news, the dollar surged.
For nearly five years, the Fed has been pursuing an aggressive monetary policy to shore up the U.S. economy, which was battered by the financial crisis in 2008. Now that the U.S. economy has shown signs of improvement, Bernanke said the Fed is considering when it should start normalizing its policy.
In the latest round of its monetary stimulus program – known as quantitative easing, or QE – the Fed has been buying $85 billion worth of financial assets each month to keep long-term interest rates low. This, it hopes, will boost borrowing and spending. After the Fed's decision to keep the policy unchanged, Bernanke confirmed that the central bank's purchases will likely slow down this year and end next year. When the reduction – so-called tapering – begins will hinge on the U.S. economic data, though.
That prompted some concern among investors who have grown used to the Fed's active involvement in the financial markets – the Dow tumbled over 200 points Wednesday while oil and gold prices slid – even though the remarks signal a healthier U.S. economic outlook. Much of the reason why a number of assets, including stocks around the world, have advanced over the past few years is that the money created by central banks through QE has found itself in financial markets.
"With an unexpectedly upbeat assessment of the U.S.'s economic prospects, an exit path from quantitative easing was duly mapped out," said Mike Ingram, market strategist at BGC Partners. "I was clearly not alone in being caught off guard; markets worldwide have plunged in response. The tide of red now engulfing my screens is indeed impressive in its breadth-if not yet depth. Virtually every financial asset has been sold. Equity, credit, bonds, commodities; all have suffered."
In Europe's stock markets, the FTSE 100 index of leading British shares ended Thursday trading down 2.98 percent at 6,159 while Germany's DAX dropped 3.28 percent to 7,928. The CAC-40 in France was 3.6 percent lower at 3,698.
In the U.S., stocks were down again, with the Dow Jones industrial average 1.2 percent lower at 14,925 and the broader S&P 500 index down 1.37 percent at 1,606.
Earlier, stocks in Asia tanked too, with stocks further negatively impacted by a private survey showing a slowdown in manufacturing in China in June. Among Asia's markets, Tokyo's Nikkei 225 fell 1.7 percent to 13,014.58 while Hong Kong's Hang Seng tumbled 2.9 percent to 20,382.87.
It's not just stocks that have responded to the developments with the Fed. U.S. Treasuries have slid, and the yield on the country's benchmark ten-year bond has risen to 2.4 percent, its highest level since October 2011.
In the currency markets, the dollar has pushed higher as the prospect of new Fed money has diminished in light of Bernanke's statement. The euro was down 0.4 percent at $1.3225 while the dollar rose 1.5 percent to 98.08 yen.
The dollar's surge is having a particular impact on commodities, which are priced in the currency.
The benchmark New York oil price was down $3.18 at $95.29 a barrel, while the gold price slid 5.9 percent, or $81.10, to three-year lows of $1,293 an ounce.
Michael Hewson, senior market analyst at CMC Markets, said gold, for so long a preferred investment for the risk-averse, could fall further now that the $1,300 level has been breached.
"While the timeline for the Fed exit strategy is very much data dependent and based on a whole host of economic indicators between now and next summer, gold prices have slid sharply as the dollar goes sharply bid across the board," said Hewson.