Tapering decision removes 2014 uncertainty in equities
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Equity

Tapering decision removes 2014 uncertainty in equities

The US Federal Reserve’s announcement on Wednesday to cut its asset purchasing programme by $10bn to $75bn means that those ECM banks who have been busy building their deal pipelines for 2014 will be able to start their new year without the uncertainty when tapering will begin hanging over them.

“The market has been going sideways for the last couple of weeks as people have wondered how the Fed would manage the tapering decision,” said one senior equity banker. “That uncertainty is over now. But it’s interesting that IPOs, accelerated book builds and rights issues have carried on unaffected over the last few weeks, despite that uncertainty, and that tells me that the long term prospects for the market are still extremely positive.”

Others agreed that the Fed’s announcement came as an early Christmas present for those bankers lining up a busy transaction calendar for 2014.

“The market’s reaction suggests that people are still looking to be encouraged to move into riskier assets,” said one banker in London. “That’s certainly constructive for the new issue market, and we expect a strong 2014.”

Indeed, bankers across the equity capital markets are optimistic following the Fed’s decision. Messages about the possibility of tapering in May and September seemed to absorb most of the violence of the markets’ reaction to tapering, and although the announcement Fed’s decision came a month earlier than many had expected, the timing just before the Christmas break should mean any impact will be muted by the period’s typically low trading volumes.

Bankers have also been reassured by the conservatism of the Fed’s decision — which will see interest rates remain low and tapering shaved by only $10bn a month linked to the continued improvement of economic fundamentals.

“Everyone is still feeling very aggressive,” said one banker. “This news will only help.”

But despite the boost in the markets on the back of the Fed’s announcement (with the FTSE all share index up 35.49 points on Thursday, and the S&P 500 rising 29.65 points), it is unlikely that issuers will take advantage through opportunistic accelerated book builds on Thursday night.

“If anything comes, it will have to be either very small or very liquid, because there are so few investors around,” said one banker. “Lots of hedge fund investors are winding down — they’ve done well this year and are not going to risk being down 2% from a block trade at this stage in the year.”

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