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The financial market freakout, in five charts

Ben Bernanke and the Federal Reserve laid out a relatively clear vision of the future path of their policies Wednesday afternoon. Markets didn't -- and still don't -- like it one bit. Here's the damage, in chart form.

The immediate trigger of the sell-off, which includes a 2.1 percent drop in the Standard & Poor's 500 index as of about 3:00 p.m., was in part due to heightened expectations that the Fed will taper its $85 billion a month program of bond purchases starting this year and end it perhaps next summer. Another factor was a weak reading on the Chinese factory sector, which raised the prospect that the world's second-largest economy could be slowing.

Here are five charts that show how different markets are being affected.

Starting at 2 p.m. Wednesday, when the Fed's statement came out, stock markets the world over started falling. The damage continued in Asian markets overnight, and the Standard & Poor's 500 index, shown here, which fell 1.4 percent Wednesday, opened down another 1.6 percent Thursday.

Interest rates, meanwhile, were on the rise, as investors apparently concluded that the Fed will be a little quicker to end its monetary easing policies than they had thought. This is the yield on 10-year U.S. Treasury bonds, an often-cited long-term interest rate. It has risen from less than 2.2 percent before the announcement to as high as 2.45 percent Thursday morning. Expect that higher rate to soon translate into higher interest rates on home mortgages and other forms of long-term borrowing.

But interest rates alone don't tell the full story. This is a measure of investors' expectations for future inflation, known as "Breakevens." Using the difference between what regular bonds are yielding and inflation-protected bonds, it amounts to how much investors expect annual inflation to be over the next five years. This shows an interesting pattern. In the immediate aftermath of the Fed's announcement, inflation expectations didn't change all that much. That means that the bond market reaction was more about a shift in "real," or inflation-adjusted rates than a shift in how much inflation the markets expect. But, oddly, that changed Thursday morning as inflation expectations plummeted. So whereas the Fed move on Wednesday seemed to have the greatest impact on inflation-adjusted real yields, the weak Chinese manufacturing report raised the prospect of lower inflation.

A common pattern in recent years has been that when stock markets sell off, so do commodity prices. This shows how the price of oil has fallen sharply in the last 24 hours. This is the one-month futures contract for light, sweet crude oil on the New York Mercantile Exchange; it has fallen from $98.44 a barrel at Tuesday's close to $95.56.

The dollar, meanwhile, rose sharply against other currencies, as investors priced in tighter money in the years ahead than they had expected. This is the dollar index, charting the currency's value against six other major currencies.

Add it up, and it is an ugly day, with stocks, bonds, inflation expectations and commodities all sliding.

Here's more on what the Fed is saying it will do, and why markets are so volatile.



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Lydia DePillis · June 20, 2013

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