For global markets, it’s all about the Fed

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For global markets, it’s all about the Fed

On June 7, the United States Labor Department announced that its unemployment rate for May was 7.6 percent, up 0.1 percentage point from the previous month.

The announcement was made during the daytime and it was widely expected that stock prices would go down after the disappointing, higher-than-expected number.

However, stocks on the New York exchange responded with apparent glee, with the Dow Jones Industrial Average rising 1.38 percent compared to the previous day’s closing.

Analysts said the surge came as investors concluded that the deteriorating employment news could pull back the U.S. Federal Reserve from slowing down its quantitative easing stimulus of the U.S. economy. Following the weekend, Korea’s benchmark Kospi also picked up.

While stock prices should go up when the economy shows signs of improvement, they’re moving in the opposite direction now.

On June 3, the manufacturing index from the Institute for Supply Management for May fell to 49 from 50.7 in April. That was the lowest since April 2009. On that day, the Dow Jones Industrial Average index rose nearly 1 percent. In the Korean market on the next day, foreign investors purchased the most number of shares this month, worth 127.5 billion won.

Analysts say that although the value of companies should rise following indicators showing economic improvement, investors are taking more notice of whether the U.S. will end its quantitative easing soon. Analysts say global stocks are going up and down not based on economic indicators but on the direction of the impact any news might have on the Fed’s policy direction.

On May 9, the number of jobless claims in the U.S. for the month of April reached the lowest amount in five years and four days later, figures showed retail sales increasing for April. Stock trading weakened.

Traders want to hear from Fed officials. When minutes were disclosed of the Federal Open Market Committee meeting on Feb. 20 hinting the Fed may pull out from its fiscal stimulus policy, stock prices at the New York and Seoul bourses plunged. Fluctuation in the global stock market was carried throughout mid- and late May based on remarks made by FOMC members.

On May 15 and 22, investors net sold shares after feeling disappointed at remarks hinting at the possibility of the Fed ending its stimulus policy. On May 21, the global market was boosted by comments made by James Bullard, president of the Federal Reserve Bank of St. Louis, that the Fed should continue its bond-purchasing program as it has been “effective.”

Last Thursday on the Seoul bourse, foreign investors became net purchasers of local shares for the first time in 15 trading days and what drove them was the announcement that the U.S. economy grew 1.8 percent in the first quarter, lower than a previous estimate of 2.4 percent. Remarks concerning the economy were also made by FOMC officials including Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, on Wednesday.

“The economy is telling us this is about all we’re capable of right now,” Lacker said in an interview with Bloomberg Television. “We’re going to continue to get growth at a fairly disappointing rate.”

Minneapolis Fed President Narayana Kocherlakota also said in a separate interview with CNBC on the same day that he favors the U.S. continuing its bond purchases until unemployment falls below 7 percent.

“I’m expecting the unemployment rate to be hitting 7 percent sometime in the second half of 2014,” he was quoted as saying.

Following these two remarks, the Dow Jones Industrial Average index jumped more than 1 percent and on the following day in the Seoul bourse, the benchmark Kospi closed at 1,834.7, up 2.87 percent from the previous day.

“There is increasing uncertainty in the market because unlike the first and second quantitative easing in which the volume and duration were fixed, the third quantitative easing is based on a general road map and may change depending on economic conditions,” said Kwak Hyun-soo, an analyst at Shinhan Investment Corporation.

BY YOON CHANG-hee, lee eun-joo [angie@joongang.co.kr]

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