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Thoughts on QE Tapering
Thoughts on QE Tapering
  • By matthew
  • July 29, 2013, 07:29
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The QE tapering has been a buzzword for markets around the world since late May.

As debates heat up, the Korean stock market pulled back below the 1,800 level last month. But stocks are now extending a sustained rebound as related fears recede.

Was the Fed QE tapering something that markets have not expected?

Daniel Cho, CFA, is head of research at Daishin Securities in Korea.​Global markets apparently did not move in line with the consensus. After the May 1 FOMC minutes were released on May 22, markets around the world began to steer away from risky assets even though the meeting itself did not trigger any fears. Stocks tumbled again on June 19 when Federal Reserve Chairman Ben S. Bernanke failed to meet the market’s expectation for accommodative remarks at the June FOMC meeting. Ironically, however, investors started to rekindle their appetite for risky assets when the June FOMC minutes were released on July 10.

Fortunately, we have seen the QE fears coming.

In our previous reports titled US QE Expansion & Korea Stock Market Forecast (Dec 17, 2012), KOSPI Nearterm Resistance and 1H13 Scenarios (Jan 7, 2013), Building Core Portfolios (Feb 5, 2013), Stock Market Viewed in the Context of Pent-up Demand (Mar 5, 2013) and No KOSPI Rally in 2Q13 (Apr 4, 2013), we predicted a major pullback in 2Q13 triggered by fears of early QE tapering.

We were able to think differently because we believed that Bernanke was undertaking QE within the purview of foreseeable policies. Detailed measures of QE3 implemented on September and December 2012 looked extremely similar to those of QE1 (strengthened policy by additional Treasury purchase three months after MBS purchase announcement), and the treasury bill purchase program did not last long in the previous rounds of QE. The only difference between QE3 and the previous rounds was that Bernanke did not set the deadline as he had seen the negative impacts (ex. stock price declines and weak macros).

In line with the markets’ consensus, we expect the Fed to take its foot off the QE3 pedal by the year-end in the forms of LIFO (Last In First Out) as seen in QE1 and QE2. The Fed is likely to end the treasury purchase program before ending the purchase of MBS in 2014. We expect the Fed to either end or shrink the bond buying around 4Q13 when unemployment rate begins to hover below 7%. In five months, the number of the employed in the US is forecast to rise to the level seen before the 2008 financial crisis.

In the near-term, global markets might experience a correction in mid August. The US July Consumer Price Index, to be announced in August, is forecast to rise nearly 2% from a year ago, which will likely give another rise to QE tapering fears. In June and July 2012, the global oil prices were near the year’s low. The WTI price has rebounded from below US$88/bbl in July 2012 to US$105/bbl in July 2013. The US gasoline price (nationwide average) has climbed more than 4% from a year ago, and the bullish trend is likely to persist during the summer driving season. The QE fears subsided after June this year thanks primarily to the consensus that the US inflation rate did not reach 2%. Markets around the world should face another critical juncture in August.

Nonetheless, we expect the upward trend will not be deterred by a shortterm correction in August and QE tapering in late 3Q13~early 4Q13 as improving macros outweigh fallouts from QE reduction. The US housing prices, which have recovered to the preQE level, is the case in point. Investors will see more of improving fundamentals and forget the fears of QE tapering. In the meantime, investors in Korea will show more interests in stocks. We expect Korean stocks to rise in 4Q13 helped by increased money inflow from domestic investors. A market correction in 2H13, if any, will be a simple withdrawal symptom after four years of indulging in liquidity.