20.12.13 Friday Morning

The euphoria surrounding tapering of U.S. stimulus throughout the last week or so has culminated in the Federal Reserve taking the risky step of beginning the winding down process. The Central Bank refrained from taking any exuberant steps, instead deciding to trim the pace of its monthly asset purchases by $10billion to $75billion. Policy makers have cited considerable strength in the U.S. economy as a key reason behind the scaling down process, with a sustained recovery now in sight.

Fed Chairman Ben Bernanke made clear at his last conference that asset purchases would be cut at a measured pace through much of next year if job gains continued as expected. Consequently, the move to taper will be seen as a clear sign that the economy and labour markets have continued to improve. In a move that will hopefully calm investors in such a volatile period, the Federal Reserve suggested that its key interest rate would stay at rock bottom even longer than previously promised.

The Fed launched its third and latest round of quantitative easing, or QE, 15 months ago to kick-start hiring and growth in an economy recovering only slowly from the recession. Its first program was launched during the 2008 financial crisis. The Fed has held rates near zero since late 2008.

Bernanke said he consulted closely on the decision with Fed Vice Chair Janet Yellen, who is set to succeed him once he steps down on January 31st after eight years at the helm. Investors took the action as a validation that the outlook for the economy was improving. After a brief pullback, U.S. stocks rallied sharply, with both S&P 500 and Dow industrials closing at all-time highs.

European shares are heading for their biggest weekly jump since April with the FSTE 100 now trading only 250 points below the May 22nd high set earlier this year. Meanwhile, gold tumbled to a near six-month low, extending months of weakness after the U.S. central bank finally scaled back its stimulus that has pushed the precious metal to record territory in recent years. Gold is on track for its worst yearly decline since 1981.

Deutsche Bank analysts said they expected the U.S. unemployment rate to fall faster than the Fed projections and the risk was that inflation pressures would start to mount earlier than the U.S. central bank anticipated.

In a move likely meant to pre-empt any sharp market reaction that could undercut the recovery, the Fed also said in its tapering announcement that it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the U.S. jobless rate falls below 6.5 percent.

Next week we are expecting markets to be exceptionally quiet owing to Christmas celebrations with volumes likely to be on the thin side. Significantly however, there is U.S unemployment claims numbers set to be released next Thursday which will definitely be scrutinised for clues into the strength of the U.S. economy.

Stock of the Week: Iofina
Loved by economists and investors alike, Iofina has enjoyed an incredible run trading up from 60p in December 2012 to the highs of 260p in May 2013. However, owing to a dramatic fall in the price of iodine along with delays in shipments, Iofina share price has dropped from the week open 135p all the way down to 79.6p.

Next Week’s Notable Economic Events:

Monday – 
•	CAD - GDP m/m @ 1:30

Tuesday –
•	USD – Core Durable Goods Orders m/m @ 13:30
•	USD – New Home Sales @ 15:00

Thursday – 
•	USD – Unemployment Claims @13:30