Japan Futures Drop as Fed Sinks U.S. Stocks; Aussie Slips

Japanese and Australian equity futures followed U.S. stocks lower as the dollar surged after Federal Reserve Chairman Ben S. Bernanke said bond purchases may be reduced later this year should risks to the U.S. economy abate. Australia’s currency slumped while oil slid.

Futures on Japan’s Nikkei 225 Stock Average fell 0.4 percent to 13,160 in Chicago and traded at 13,200 by 3 a.m. in Osaka, after closing at 13,260 yesterday. Contracts on Australia’s S&P/ASX 200 Index slid 1.1 percent. Standard & Poor’s 500 Index futures dropped 0.1 percent by 7:39 a.m. in Tokyo. The gauge lost 1.4 percent in New York to erase most of a two-day rally as the dollar jumped against 13 of 16 major peers. The Aussie sank to the weakest level on a closing basis since September 2010, while gold futures declined.

Stocks and Treasuries retreated in New York as Bernanke said that the Fed may begin reducing bond purchases this year and end the program in 2014 should the U.S. economy continue to improve. The Federal Open Market Committee said in its statement that risks to the economic outlook and the labor market have diminished, reiterating that policy makers are prepared to reduce or increase the pace of asset buying depending on the outlook for jobs and inflation.

“The Fed wasn’t as dovish as people expected and while that’s a good thing in terms of what it says about the U.S. economy the market will focus on the timeline given for the tapering,” Bevan Graham, chief economist in New Zealand at AMP Capital Investors Ltd., said by phone in Wellington. “The tapering of quantitative easing is just an end to the easing phase, we’re a long way off from tightening.”

Treasury Yields

Yields on 10-year Treasury notes jumped 17 basis points to

2.36 percent, the highest level since March last year. The Dollar Index, a gauge of the U.S. currency against six major peers, rose 1 percent to 81.43 yesterday. The Aussie extended yesterday’s 2 percent plunge, falling 0.2 percent to 92.74 U.S. cents, the weakest level on a closing basis since Sept. 10,


The yen retreated 0.2 percent to 96.64 per dollar after sinking 1.2 percent yesterday. It dropped the same amount to

128.42 per euro, weakening for a fourth day against the common European currency.

Fifteen of 19 participants on the Federal Open Market Committee expect the first rise in the federal funds rate to occur in 2015 or later, forecasts released yesterday in the U.S. showed. That exceeds the 14 of 19 who projected in March the first rate increase would happen after 2014.

Inflation Outlook

The FOMC said in its statement that policy makers also anticipate that inflation over the medium term will probably run at or below its 2 percent objective.

U.S. central bankers in December linked changes in benchmark borrowing costs to the outlook for employment and prices. The FOMC said the rate will remain in a range of zero to

0.25 percent so long as unemployment remains above 6.5 percent and the outlook for inflation is no higher than 2.5 percent. The nation’s jobless rate in May was 7.6 percent.

The U.S. unemployment rate will fall to 6.5 percent to 6.8 percent by the end of 2014, Fed officials predicted, possibly reaching the central bank’s stated threshold to raise the benchmark lending rate. The pace of its bond purchases, currently at $85 billion a month, will also be influenced by economic data, Bernanke said.

‘Measured Steps’

“The committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year” if economic data are broadly consistent with the Fed’s forecast, Bernanke said at a press conference in Washington. “And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Speculation the Fed will begin withdrawing its stimulus measures has boosted trading in an exchange-traded note tracking U.S. volatility. The iPath S&P 500 VIX Short-Term Futures ETN was the third most-active ETF in the U.S. yesterday, with 86.7 million shares changing hands, according to data compiled by Bloomberg.

Futures on Hong Kong’s Hang Seng gauge added 0.2 percent, while contracts due this month on the Hang Seng China Enterprises Index of mainland Chinese stocks traded in the city climbed 0.3 percent. The MSCI Asia Pacific Index of regional equities advanced 1 percent to a two-week high yesterday, up more than 3 percent from an almost six-month low reached June 13 after the Bank of Japan added to concern over reductions in global stimulus by leaving its lending program unaltered.

Fueled Rally

The Fed’s record low interest rates and bond purchases have helped fuel a rally in stocks that has lifted the S&P 500 as much as 147 percent from its bear-market low in 2009. The MSCI Asia Pacific measure has climbed 33 percent in the past four years.

“A lot has been predicated on their assessment of the economy, and the assessment is that the economy is improving,” Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees more than $1 trillion of assets, said by phone yesterday. “The search for yield has forced investors into esoteric parts of the market. Just the hint that the Fed is going to start scaling back puts these positions at risk.”

Crude oil extended yesterday’s 0.2 percent drop, declining

0.4 percent to $97.86 a barrel. Gold futures due in August lost

1.8 percent to $1,349 an ounce, set for the biggest one-day drop since June 7.

Interest Rates

The quantitative easing program suppressed interest rates, with the yield on the 10-year Treasury note reaching a record low of 1.39 percent in July and remaining below the S&P 500’s dividend yield for most of 2012 and 2013. The benchmark note’s average rate over the past year has been 1.78 percent, compared with an average of more than 6.5 percent in data compiled by Bloomberg starting in 1962.

The S&P 500 last reached a record 1,669.16 May 21, the day before Fed Chairman Bernanke told Congress the central bank could begin to reduce the pace of asset purchases should the job market shows signs of sustainable improvement The benchmark gauge has slumped 2.4 percent since then. Ten-year Treasury yields topped 2 percent that day for the first time since March.

The lowest rate of inflation since the brink of the Kennedy-era economic boom in the 1960s bought time for the Fed to press on with the central bank’s $85 billion in monthly bond purchases.

Taper Timing

A gauge of consumer prices excluding food and energy that is watched by the Fed rose 1.1 percent in the year through April, matching the smallest gain since records started in 1960. With inflation below the Fed’s 2 percent long-run goal and the jobless rate at 7.6 percent, the Fed is falling short of its mandate to ensure stable prices and maximum employment.

The Fed will probably wait to taper bond buying until its Oct. 29-30 meeting, when it will cut its monthly purchases to $65 billion, according to the median estimate in a June 4-5 Bloomberg survey of 59 economists. By then, inflation will be rising toward the Fed’s target, accelerating to 1.3 percent in the third quarter and 1.5 percent in the fourth quarter, according to economists’ estimates.

“The market has been looking for clarity and the Fed simply can’t give it to them,” Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said by phone. “As relatively more clear as Bernanke tries to be, the Fed is still somewhat opaque in what they say. They can’t come out and say ’We are going to start raising rates on this day.’ They have to be guarded in how state it.”

Fed Rallies

While the end of Fed stimulus has preceded stock gains over the past two decades, those rallies usually followed periods of market weakness. The S&P 500’s 87 percent advance since the rate on overnight loans between banks was pushed to zero in December 2008 is more than five times the average advance in periods following monetary easing, data compiled by Bloomberg show.

The S&P 500 has increased an average of 16 percent over two years the last four times the central bank started raising interest rates, according to data compiled by Bloomberg. Stock market volatility has been higher this year than during past periods when the Fed reversed policy. Daily moves for the S&P 500 have averaged almost 0.7 percent since March, compared with

0.44 percent in the month before the Fed tightened in 1994 and


European markets closed before the Fed statement, with the Stoxx Europe 600 Index losing 0.2 percent.

Emerging Markets

The MSCI Emerging Markets Index fell for a second day, sliding 1.4 percent to the lowest level since September. Brazil’s Ibovespa sank 3.2 percent to its lowest level since April 2009. South Africa’s rand extended its decline into a fifth day, losing 0.2 percent versus the dollar after dropping

1.9 percent yesterday.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. fell 2.5 percent to the lowest level since August.

The S&P GSCI gauge of 24 raw materials added 0.5 percent yesterday, rising for a second day, as corn, wheat and soybeans jumped at least 1.6 percent to lead gains on speculation that rain and cool temperatures during April and May reduced U.S. planted acreage and cut yield potential.