Markets spooked by US plans to withdraw quantitative easing

Richard Edgar

Former Economics Editor

The US dollar displayed in front of China's yuan banknotes. News from both countries has spooked markets. Credit: Reuters

You may have heard of the idea that a hurricane can be triggered weeks before by a butterfly flapping its wings thousands of miles away. It’s no more than a theory but investors are often on the lookout for seemingly small events which can trigger big moves in markets.

Today they got one. Comments by the head of the American central bank, mild-mannered Ben Bernanke, hinted that he may gradually draw America’s version of quantitative easing to a close a little sooner than expected.

At the moment the Federal Reserve, which he heads, is pumping 85 thousand million dollars into the American economy every month. It’s emergency medicine and must end sometime but while it lasts is directly or indirectly helping to fund some investments.

The mention of it being pulled - even a nuanced and subtle mention - has rattled investors.

Read: What is quantitative easing?

The biggest move was in Japan, thousands of miles to the east of New York, where the main market fell over seven percent, a remarkable fall, compounded by some weak data from China, a key export market for Japanese goods. A hurricane (or cyclone) in financial terms, perhaps.

By the time London and other European markets opened there were some more considered views. The FTSE100 index of leading companies fell two percent and stayed there for most of the day. It’s a sizeable drop - the biggest for several months - but only takes the index back to where it was on Friday.

Coming full circle to America, investors in New York markets have had much more time to digest both Mr Benanke’s comments, the share falls in Asia and Europe and, perhaps, whether any stray butterflies have been flapping.

Their verdict is even more relaxed, shares have fallen less than half a per cent at the time of writing.

What are we to make of this? Well, share markets around the world have had a pretty good run in recent months.

The Nikkei, in particular had risen over 80 per cent in six months (it’s still 67 per cent up after today’s fall). The FTSE was up 22 per cent over the same period yesterday and is still up by almost a fifth in that time. One stock broker told me today that some in the markets had become a little too relaxed with shares edging up every day, “bored, even” he said. Some of today’s fall may be a panicked reaction to a change in dynamics, a knee-jerk response.

There are many who question whether the relentless rise of share prices reflect reality - does a booming stock market make sense when our economy has been stagnating for years?

On the other hand, consider why the Federal Reserve is mooting slowing QE in future months because it sees signs that the US economy, at least, might be emerging from the dark days and no long needs emergency help. That, to my mind, is a good thing.

Hurricanes and cyclones run out of puff, sometimes before they do too much damage. Keep your eyes peeled for butterflies.