Will the Fed’s Actions Undermine Europe?
The U.S. Federal Reserve’s signal that it will stop pumping money into the world economy sank bonds, shares and commodities alike. But the real problems could take place in Europe, where bond yields are critical to struggling eurozone countries.
Indeed, it’s being hailed as the end of easy money: U.S. Federal Reserve Chairmen Ben Bernanke gave his clearest indication yet of a timeframe for tapering back its $85-billion-per-month stimulus program.
And that has investors now moving into “fear on” mode.
“What we see is the fear of normalizing monetary policy, and that means every market that’s been helped by very easy monetary policy and quantitative easing is very vulnerable to correction,” said Reuters Breakingviews Editor Edward Hadas. “And unfortunately that just means everything,”
Including the eurozone.
Italian and Spanish yields jumped as investors sold off lower-rated eurozone debt heavily on Thursday.
Strategists say there’s a risk of another mini crisis in the eurozone if bond yields continue to rise and borrowing costs continue to become more expensive.
It could mean Ireland and Portugal take longer to exit their bailout programs.
However, IHS Global’s Jan Randolph says the eurozone does have the power to control its own destiny.
“I think the eurozone issues are very much what the ECB does and, more importantly, each individual government and how they handle their particular set of challenges,” Randolph said. “Whether it’s privatization, structural reforms, whether it’s deregulation or improving competitiveness in the southern eurozone… These are far more important, I think, than what is happening to the U.S. Fed.”
While the Fed’s move may indicate that a U.S. recovery is becoming more likely, it’s a different story in Europe.
Markit’s PMI data out on Thursday showed a slight improvement in June to 48.9 – but new orders are still contracting, rather than growing.