Global Markets Feel the Fed Sting
Equity, bond and commodity markets sold off sharply in Europe and Asia on Thursday, picking up the baton from the sharp falls on Wall Street, after the U.S. Federal Reserve suggested it could start to unwind its monetary stimulus program later this year.
European shares traded sharply lower on Wednesday as the market digested comments from Federal Reserve Chairman Ben Bernanke suggesting that asset-purchases could end later this year.
News that the flash HSBC China Purchasing Managers' Index, a gauge of manufacturing activity, hit a nine-month low in June exacerbated the sell-off in Asian markets as investors also fretted about the outlook for the world's second biggest economy.
Japan's benchmark Nikkei stock index tumbled 1.7 percent, gold prices extended their falls to hit a one-month low and emerging market currencies took a beating with the Malaysian ringgit falling more than 1 percent to its lowest level in about a year.
(Read More: After the Fed—What's the Market's Next Move?)
"Markets are not trying to rationally judge what the real impact of a tapering of QE [quantitative easing] is likely to be," said Richard Jerram, chief economist at Bank of Singapore on CNBC Asia's "Squawk Box."
"I think everyone is looking at everyone else in the market and trying to figure out if there is going to be panic. And if you want to panic you want to do it early, which is why we've seen volatility," he added.
The Fed concluded a two-day meeting on Wednesday with a statement that the central bank would continue its $85 billion worth of monthly asset purchases for a while longer, but Bernanke hinted the policy could start to be unwound later this year.
(Read More: Taper Tipoff? Bernanke Hints Easing End Is Nearing)
Markets globally have been gripped by fears of unwinding of the Fed's monetary stimulus program for the past month and Wednesday's comments from Bernanke added to the unease.
"For weeks now we have been talking about higher interest rates and for the most part we do have these targets for unemployment and inflation, but it will take time for the dust to settle," said Ben Lichtenstein, president at Tradersaudio.com, referring to the Fed's commitment to keep its key interest rate near zero until unemployment falls to 6.5 percent and inflation rises to 2.5 percent.
The jobless rate currently stands at 7.6 percent while inflation is at 1.4 percent.
U.S. stocks closed broadly lower overnight and Treasury bonds extended their losses into Thursday's Asian trading session, with the benchmark 10-year yield hitting about 2.38 percent – its highest level in more than a year.
Spot gold prices slipped for a fourth session running, falling to as low as $1,338 an ounce while the Australian dollar, which fell more than 2 percent overnight, extended its falls after the weak Chinese PMI data. The Aussie dollar fell to $0.9237 – a level not seen since September 2010.
The negative tone in Asian markets did not bode well for European markets, which open later in the day.
(Read More: Goldman Sees Increased Risk of Tapering by December)
"I don't think it makes sense to be selling risk assets down so aggressively this early into a small shift in expectations about the timing for a policy change," said Bank of Singapore's Jerram.
Emerging Market Pain
Emerging market assets, which in some respects have borne the brunt of the Fed jitters, remained under pressure on Thursday.
The Fed's asset-purchase program has fuelled liquidity in global markets in recent years and some of the extra cash has made its way into emerging markets. And so talk of an unwinding of the Fed's monetary stimulus is hitting emerging market assets especially hard.
The Malaysian ringgit and Thai baht for instance both fell more than 1 percent against the U.S. dollar on Thursday.
"When the Fed officially changes policy that should be called a tightening of monetary policy and that means we have to be cautious about all kinds of emerging market assets," Alain Bokobza, head of global asset allocation at Societe Generale told CNBC.