Macro: The Bottom Line (12/23/2013)

• Fed starts tapering
• Mexico opens its energy industry 

Fed starts tapering: The "big event" for US markets last week was the final FOMC meeting of the year. Following the meeting, Fed policymakers decided to "taper" their bond-buying QE program by $10B (from $85B to $75B). This decision caps a 2013 marked by market volatility (at times extreme) over the question of when the Fed would pull the trigger on tapering. Notably, however, the post-announcement market reaction was largely muted, with both Treasury yields and the dollar trading largely flat on the day. There are two possible explanations for what would seem like a surprising lack of alarm from the markets. First, aside from the tapering itself, the Fed added some language reinforcing its commitment to keeping interest rates low (for example, committing to leave rates untouched as long as inflation is projected to be below 2% and unless unemployment falls well below 6.5%). The second factor has to do with what we on Red Bull have been pounding the table on for weeks now: tapering does not equal a shrinking of the Fed's balance sheet. Tapering still means that the Fed will keep pumping tens of billions of dollars of liquidity into the markets well into 2014, albeit at a slower pace. And even once it ends QE altogether, the Fed will likely still reinvest proceeds from its bond- and mortgage holdings. So for all the headlines (and headache) that tapering has caused through 2013, the mantra still holds: easy money is here to stay, with all its longer-term consequences for the dollar.

Mexico opens energy industry: At a time when the US Congress continues to be the epitome of dysfunction, Mexico's lawmakers have accomplishment something truly revolutionary: they, working closely with the administration, have successfully pushed through a comprehensive constitutional amendment that allows private investors to actively share in Mexico's oil wealth. As a background: back in 1938, Mexico's government enshrined the State's primacy over natural resources in the Constitution, and allowed the state-owned oil monopoly (Pemex) the exclusive rights to exploit those resources. It's as if the US Constitution banned oil/natural gas exploration and production to all but a Dept of Energy-controlled federal entity - there would very likely be no fracking boom! Thankfully, Mexico's politicians have recognized that for the country to become a 21st-century player in global energy markets, such archaic laws do more harm than good. This is one of the few major structural reform initiatives being taken in emerging market, and the investment implications are hard to underestimate. Mexican assets, from the peso currency to the country's equity markets, could see an extended boost going forward. Not to mention the benefits to be reaped by US energy firms, which now find themselves with new untapped opportunities available to them just south of the border.