Time to adjust to US stimulus trim

Financial markets will have to start accepting the tapering actions of the United States Federal Reserve because they appear to be here to stay, Craigs Investment Partners broker Chris Timms says.

Global equity markets fell yesterday after the Fed further trimmed its stimulus by $US10 billion ($NZ12.3 billion) a month, down to $US65 billion.

The tapering means the Fed will spend less on its monthly bond-buying programme as it sticks to plans to wind down its stimulus despite the recent turmoil across many emerging markets.

The Fed has pumped more than $US3 trillion into the US economy since the financial crisis rocked global markets in 2008. Some of that money went into higher-yielding emerging market assets, a reason for the recent turmoil.

Mr Timms said the quantitative easing (QE) programme created a chase for yield but that game was now over as it was creating potential bubbles.

''By continuing the taper, the Fed is mitigating future risk. I'd rather have a correction now than a bubble bursting down the road.''

The further tapering had been talked about but was somewhat unexpected, Mr Timms said.

Fed chairman Ben Bernanke used his last meeting as chairman to reduce the bond-buying before handing over on February 1 to Janet Yellen.

Asked about Mr Bernanke's legacy, Mr Timms said it would take two or three years to understand properly how the retiring chairman handled the global financial crisis.

''He printed bucketloads of cash and that will be measured by the impact it has on the US economy as the stimulus is withdrawn. Green co-leader Russel Norman wanted to replicate the cash buying but you never hear that from him now.''

With Moody's Investment Services maintaining New Zealand's Aaa credit rating, government borrowing costs would remain lower than those of other countries, helping the economic recovery, Mr Timms said.

The New Zealand and Australian dollars fell in value against the US currency after the Fed announcement.

However, the New Zealand dollar still maintained its strength against the Aussie.

The kiwi, which touched an eight-year high against its Australian counterpart this month, is not expected to climb to parity in 2014 as a strong local currency dents exports and Australia's economy improves following the end of a mining boom.

Just three of 22 currency analysts and economists in a BusinessDesk poll expected the New Zealand currency to trade on a par with the Australian dollar this year.

The New Zealand dollar recently traded at A93.87c and reached A95.31c on January 24, its highest since December 2005 when it touched a post-float high of A95.82c.

New Zealand's currency has accelerated 17% against the Aussie in the past year, as a strengthening local economy contrasts with a slowdown in Australia.

 

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