Investors Weigh the Consequences of the Fed’s Reduction of Monetary Stimulus

Asian markets are trading cautiously today, with most indices recording a slight decline for the third trading day in a row, as investors weigh the potential consequences of the expected imminent reduction of the Fed’s monetary stimulus to the U.S. economy.

The Japanese Nikkei index rose 0.4 percent this morning to 13,706 points, while the South Korean Kospi weakened by 0.3 percent, the Hong Kong Hang Seng by 0.2 percent, and the Australian S&P/ASX by 0.1 percent.

Other Asian markets also saw slight declines, while the Philippine stock exchange was closed due to flooding.

The MSCI Asia-Pacific index, excluding Japan, fell by 0.5 percent to 444.56 points.

“The market will carefully read the minutes from the last meeting of the Fed’s Open Market Committee, which will be released on Wednesday, to see if there are any new signals regarding the reduction of monetary stimulus in September, which everyone is now expecting. There are concerns that a too large cut in stimulus could disrupt the markets,” emphasizes Martin Lakos from Macquarie Private Wealth.

The Fed has aggressively purchased government bonds in recent months in an effort to lower interest rates and assist in the recovery of employment to normal levels after millions of Americans lost their jobs in the recession that followed the 2008 financial crisis.

The Fed emphasizes that this program has helped stimulate the economy by facilitating real estate purchases and business investments. However, Fed officials have consistently pointed out that this program is not unlimited and will be gradually phased out as the economic situation improves.

Recent macroeconomic indicators and statements from Fed officials have led investors to conclude that the Fed could reduce its bond-buying program, worth $85 billion per month, as early as September.

Last week’s decline in bond yields in the U.S. is one of the signs that traders believe the Fed’s move is inevitable. However, analysts warn that a sharp rise in borrowing costs could stifle economic growth, which could shake the stock markets.

“If it seems that the cut in the bond-buying program is too large, it will have the opposite effect on the local economy, and the Fed will have to take steps again. A somewhat more likely scenario is that it will extend the timeline for the complete cessation of monetary stimulus,” believes Evan Lucas from the Australian investment firm IG.

In the currency markets, the euro strengthened against the dollar, supported by improved economic prospects for the eurozone, after it was officially announced last week that the region had emerged from its longest recession in history. The euro strengthened from Friday’s recorded 1.3319 to 1.3323 dollars.

At the same time, the dollar rose slightly against the yen, from 97.53 to 97.59 yen.