Those who kept an eye on global financial markets, will have taken note of the severe impact a ‘casual remark’ by the governor of the Federal Reserve Bank had on these markets in June, when shares took a knock of around 6%, while interest rates responded with an immediate increase, albeit a fairly modest increase. Was this vicious response not foreseen by the governor to have tried to put his comment in a more rosy perspective shortly afterwards?

In any event, this ‘oral refurbishment’ again impacted strongly on global equity markets in July, this time with a strong upward movement. So where does this leave the investor, more particularly trustees who are charged with the responsibility of overseeing the investments of their funds?

It seems that the US Fed is in quite a predicament as shown by the recent violent swings in global financial markets. Equity investors and borrowers are praying that the Fed, in particular may not withdraw its bond buying programme while fixed interest investors are hoping that it will, so that they once again may earn positive real interest rates.

Most probably global investors are more and more coming to expect that the Fed will taper off its bond buying programme in the foreseeable future and are starting to adjust their investment strategy on the basis of this expectation.

It is also likely that the Fed will not splash their intentions across the media in future after the recent scare effect. Listening to statements made since, there are now more ‘ifs’ and ‘buts’ that seem to be designed to be less dogmatic about what steps to take when. These can be interpreted to be ‘cautionary announcements’ for investors not to place too much reliance on the Fed keeping up its programme unchanged.

What appears to happen as far as local financial markets are concerned is that foreign portfolio flows are declining. As the result, interest rates are on the increase, consistent with a more cautious stance of global investors and the general expectation that the Fed’s bond buying programme will start tapering off in the foreseeable future.

An article on the same topic, ‘Investing after Bernanke’, that our reader may find of interest appeared in Moneyweb of 2 July 2013. If the topic interests you, click here...