US central bank tightens its belt

Last updated 05:00 22/06/2013

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Investors could be forgiven for feeling the bull rally that has dominated sharemarkets for the past year is ready to turn after the US Federal Reserve this week signalled it is ready to tighten monetary policy.

Certainly global sharemarkets have been awash in red ink since Fed chairman Ben Bernanke announced the US central bank is planning to reduce its monthly asset purchases and could stop printing money altogether by 2014.

That spooked global investors who are fearful of having the monetary policy rug, which has fuelled the 12-month rally, pulled out from under them.

Overnight on Wall Street, the Standard & Poor's 500 Index dropped 2.5 per cent to 1588.19, and the selloff continued into the Asian trading day, with Tokyo's Nikkei 225, the S&P/ASX 200 and the NZX all down by 0.6 per cent.

But brokers are urging investors not to panic, saying many of the policy settings which have driven the performance of share portfolios are still in place, and look set to remain in place for the medium term.

"There is uncertainty on how the Fed will actually get out of what they've got themselves into, and that's not good for equity markets and has caused a sell off," said Grant Williamson, a director at South Island brokerage Hamilton Hindin Greene.

"But what are you going to put your money into when interest rates are so low?"

He believes the low interest rate environment will continue to draw money into the equity market as investors chase higher returns on their capital, with international bank rates effectively paying a negative return once inflation is factored in.

Indeed, Bernanke took pains to stress at his Federal Open Market Committee meeting this week that US interest rates will remain on hold despite signs of further improvement in the world's biggest economy.

Williamson notes that investors also factor in the movements of the currency when assessing the New Zealand sharemarket and its effect on flighty international money invested in Australasia.

The New Zealand dollar has shed about 10 per cent of its value in recent months, and is currently trading at around US77 cents.

That drop in the currency has outstripped the yield and capital appreciation gains on most stocks, promoting overseas investors to sell up to book profits, making the sharemarket performance look worse than it is.

"We, as retail brokers, haven't seen a lot of selling from our clients recently," Williamson said.


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