After it was learned the U.S. Federal Reserve has dumped 6% of its humongous bond portfolio in the last 90 days and The Wall Street Journal reported the Fed for the first time since December 2008 may stop assuring investors interest rates will remain low, all hell broke loose in stock markets around the world. The Greek index suffered its biggest crash in 27 years and China’s Shanghai Exchange plummeted the most in 5 years.
The Federal Reserve appears to be positioning its own investments for higher inflation and rising interest rates. The Fed topped-out the size of its humongous investment portfolio in August at $4.07 billion. But in the last 90 days, the Fed quietly dumped $259.2 billion or 6.3% of its entire holdings.
Former Federal Reserve Chairman William McChesney Martin famously said the main job of the Fed is “to take away the punch bowl just as the party gets going.” The party he was concerned about is speculation and inflation. Breitbart reported on March 19, 2014 in “Fed Chair Yellen Indicates Higher Interest Rates Ahead” that Janet Yellen promised that if the risk of inflation rose, the Fed would quickly tighten credit by selling bonds to push interest rates higher in order to strangle speculation and price increases.
When chief economics correspondent for The Wall Street Journal, Jon Eric Hilsenrath, reported that Federal Reserve officials at their December 16 and 17 board meeting would seriously considering eliminating assurances they provided for six years that interest rates would remain low, investors across the globe hit the sell button.
China’s Shanghai Exchange initially went against the rout by rallying +2.4%. But soon massive selling waves wiped out the gain and pushed prices down. The 5.4% cash is the worst drop since the 2009 financial crisis. The value of shares changing hands on China’s Shanghai and Shenzhen exchanges reached an all-time record $193.4 billion.
China’s Securities Depository and Clearing Corp.’s, concerned about speculators defaulting on bank loans, announced higher margin percentage requirements and elimination of over a $1 trillion of bonds as acceptable collateral for leveraged traders. The Financial Times reported that with Industrial and Commercial Bank of China, China Construction Bank, and Bank of China facing a liquidity crisis, they all raised rates on time deposits to 20% above rate last week.
Once European markets opened, the Greek Athens Stock Exchange index suffered its worst loss in 27 years falling 11% on fears of a new banking crisis. The shares of the National Bank of Greece lost 15% and Piraeus Bank shares plunged 17%. Government 10-year bond yields in Europe’s most indebted nation saw yields jump 48 basis points to 7.73%.
The Russian stock market fell 4.8% as the ruble currency fell 0.7% to near a 10-year low. The Bank of Russia intervened in the currency market for the third time since being forced by capital flight to allow the currency to freely float last month.
In the Americas, Venezuela bond prices collapsed to just 45% of face value, the lowest level since 1998. Credit default swaps traded on the New York Mercantile Exchange now predict a 48% probability that the oil rich socialist paradise will default on their debt within 12 months.
Despite all the turmoil around the world, the U.S. markets were down only about one percent in mid-morning trading as investors moved into the safety of the U.S. dollar.
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