Stock Market - The impact of Fed Tapering 85 Billion US$ bond buying
To stimulate the US economy growth and push up the home prices, Fed is buying bonds that are worth of 85 billion US$ every month for the last several quarters. Currently while unemployment rate is coming down and stock market is fully recovered from March 2009 low, Fed is considering to slow down its bond buying programme, which is called Fed Tapering.
Current allocation of 85 billion US$ bond buying is splitted into two categories:
Buying Long Dated Treasury Bonds - $45 billion
Buying Mortgage-backed Securities - $40 billion
Fed wants to keep this pace as long as inflation is under control and unemployment rate is coming down. Since labor market is improving so much, Fed may consider slowing down its bond buying programme and completely withdraw by middle of end of next year.
When the Fed does Tapering, interest rate will move up but it is unlikely to have any major impact on stock market since it is a well known face most of the stocks are already priced in for Fed Tapering. It may have a sell off for a day or two. Slow down in home sales is also unlikely since we have huge demand and low inventory. The only problem is home buyers will get disappointed with interest rate ticking higher.
Qualified home buyers but not locked to interest rate, might have problems if they are very close debt to income ratio. Increasing the interest rate will raise the EMI.
The dollar can rally for a day or two. But again it will end very soon since it enjoyed a big rally for a long time in the last couple of months. Gold prices will stabilize and will move higher. The downside risk of Gold Prices are very low since Gold Producers will create a supply shortage when the prices drops below $ 1250 per Troy Ounce.