Federal Reserve Chairman Ben S. Bernanke is granting his international counterparts some relief from the tighter borrowing costs he forced on them this year.

Four months of rising bond yields around the world and reduced capital flows into emerging markets were thrown into reverse by the Fed's surprise decision yesterday not to pare its $85 billion in monthly asset buying. Yields on the bonds of Spain, France, Thailand and Turkey were among those to fall in response, and currencies including those of India and Malaysia dropped against the dollar [Ed: the INR and MYR strengthened against the USD].

Such shifts should prove welcome news for global policy makers such as Mario Draghi and India's Raghuram Rajan after summer-time signs the Fed was set to curb monetary stimulus led investors to whip capital out of emerging markets or enforce higher interest rates on still-sluggish economies. A falling dollar and the knowledge that so-called tapering is merely postponed could check any renewal of confidence.

"It helps those central banks concerned about rising interest rates, as just maybe it will break the upward trend in bond yields," said Peter Dixon, an economist at Commerzbank AG in London. "It will also take pressure off emerging markets although we still know tapering is coming so it may just be a short-term relief."

Spanish and Italian bonds rose along with government debt across Europe, while yields on Thailand's 10-year bonds fell the most since June and the rate on Turkey's two-year note reached a two-month low. Emerging-market stocks surged, led by the biggest gain in Turkey's shares since 2010. The currencies of Malaysia, Thailand and India all rose more than 2 percent versus the dollar.

David Fuller's view Watching some of CNBC's US Squawk Box from the home gym this morning, there was plenty of self-indulgent anger, surprise and frustration expressed by the hosts, staff contributors and some guests regarding Chairman Bernanke's decision not to taper. Clearly, plenty of people held short positions, evident from the $60-plus jump in gold, $1.70-plus surge in silver, shown on daily charts, and Wall Street's late rally which took most indices to new all-time highs, including the DJIA, S&P 500 and Russell 2000, shown on 10-year weekly charts.

Many of the talking heads, it seems, were influenced by each other, and / or Mr Bernanke's forecasts of several months ago which proved to be too optimistic. Forecasts are educated guesses at best but they should have paid more attention to Mr Bernanke's targets for tapering, which have never been approached, as Fullermoney has pointed out on a number of occasions. (See also Wednesday 21st August 2013 and Friday 30th August.)


The biggest stock market gains occurred in a number of emerging markets today, which were already recovering from deeply oversold conditions. These include India's Nifty +3.66%, Thailand's SET +3.47% and Indonesia's JCI +4.65%. I think this was due less to short covering than relief that their bond yields had declined and their currencies had strengthened following Wall Street's lead.

While this is good news for investors in the short-term, there are two problems: 1) Most stock markets are rapidly becoming overextended once again; 2) Most stock markets are also taking the cue from Wall Street, where Mr Bernanke is pulling the strings. We have often seen market correlations over the years but QE has intensified this relationship. We also know that QE will end, probably over the next year or two. Therefore, we can expect choppy conditions to persist, particularly for emerging markets. This remains a buy-low-sell-high environment.