Taper Talks back on the radar...

Equity indices have been trading under pressure since hitting 16700 in Wednesday's first half.?The combination of "too-high-too-fast" moves in the indices and headlines from Afghanistan have contributed to a bit of risk aversion. More restrictions on China tech companies is also keeping the EM markets under pressure.?

However, the real clincher is the Fed decision to taper bond purchases. From various Fed talks, it has been clear in the last few weeks that Taper is a question of WHEN and NOT IF.?

Plain English, Please!

To counter Covid impact and to support the economy, the Fed decided in Mar-20 to inject liquidity of 120bn$ per month in the form of Mortgage backed securities (MBS) and Treasury?securities. Since the economy has recovered well, vaccination drives have made substantial progress and unemployment remains under target, the Fed needs to start reducing these monthly purchases, colloquially known as "Tapering of purchases".?The decision of doing so is likely to be taken in Sept FOMC meeting and the taper may follow from Oct-21 or Dec-21 meeting (Fed meeting happens every 45 days, 8 meetings in a calendar year). This is well telegraphed in the market and somewhat priced in.

Then, why did the markets fall into a well on Wed/Thu?

Most analysts and media reports are inadvertently putting it on Fed minutes (of July meeting) released on Wed night. A look at the transcript shows little untoward or new information in the minutes. The clincher came from a speech by St. Louis Fed President James Bullard.?

Let me explain how...

In the 2014-15 taper process, the Fed reduced the bond purchases by?10bn$?every meeting. For 85bn$ QE, it took 8 meetings to finish the QE (last meeting, we went from 15bn$ to zero).?

In this current period, it is expected that taper will be?either 10bn$ or 15bn$?every meeting. Hence, the expectation is of 8-12 meetings to finish the QE starting from Oct/Dec-21

Mr. Bullard had other ideas and wanted to spoil the party. He commented that "to save the economy from inflationary shock, the Fed should finish tapering by Q1-2022". This means in his opinion, taper?should be finished in 4 meetings with 30bn$ taper?in each meeting. Clearly, this is much more hawkish than what the market was expecting till now. As a result, markets driven by Algos on BBG headlines fell off the cliff on Wed night and Asian markets reacted accordingly on Thu morning.

Please note that Bullard is not a voter in 2021 and hence, his vote does NOT count in when the taper starts and at what levels.?He is a voter in 2022 and may push for a faster taper then but if one has followed Fed over the years, it is clear they don't like to derail the markets by giving surprises. They have learnt enough lessons from the 2013 Taper tantrum fiasco.

Fine, now what do we have to do?

Actually, nothing!?The taper process is a usual economic process to take out excessive liquidity.?A strong US economic recovery is good for the global economy and markets; and continuing low rates and comfortable liquidity for next one year should continue to support the risk trade.?

Two things are very clear - (a) The taper will be gradual from the Fed?and (b) RBI will remain accommodative?as long as possible.?Any rise in Covid cases due to Delta variant or any other form of mutants may quickly put Fed taper plans into slow gear.

Rather than worrying about this, it is more critical to keep a tab on our stocks and see how they are reacting to fast changes in this environment. And react accordingly!