Thursday, 22 August 2013

Fed tapering looms, emerging markets at risk, US stocks show overvaluation

Global markets fell again on Wednesday as the minutes of the last Federal Reserve monetary policy meeting showed support for the reduction of monetary stimulus.

Bloomberg reports the Fed minutes:

“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the Federal Open Market Committee’s July 30-31 gathering released today in Washington.

“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes show. “Almost all participants confirmed that they were broadly comfortable” with the committee moderating “the pace of its securities purchases later this year.”

While the focus has been on the Fed's monetary policy, emerging markets have also been hit. Unsurprisingly as the Fed's tapering is expected to have an economic impact on countries like Turkey, China and other Asian economies.

The focus on the direction of Fed monetary policy has also resulted in the market looking past still-positive economic data. A report on Wednesday showing that US existing home sales jumped 6.5 percent in July did little to prop up the market.

In any case, markets may have outrun fundamentals. Cullen Roche says that the US stock market is looking overvalued based on comparisons between stock prices and several fundamental indicators, including earnings, asset values, revenues and US GNP.

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