LONDON / SYDNEY – Global stocks were heading for their biggest drop in weeks on Thursday after the US Federal Reserve surprised investors by noting that it could raise interest rates at a much faster pace than it has expected. it was supposed, which would raise the yields of bonds and the dollar considerably.
The dollar joined what was the strongest one-day rise in 15 months after the Fed meeting, while Europe’s government borrowing costs rose after U.S. Treasury yields. at 10 years they rose to their highest since the beginning of March.
Europe’s STOXX 600 snapped a 9-day winning streak, the longest since 2017, with an early decline of 0.3%. Asia-Pacific stocks closed 0.7% lower, while Wall Street futures pointed to a modest 0.4% drop.
The Fed’s forecasts showed that 13 of 18 policy board members saw rates rise in 2023 compared to just six previously, while seven made a first move in 2022.
“The Fed’s new ‘dot plot’, which indicates that the average FOMC member is now forecasting two Fed rate hikes in 2023, versus none in the March iteration, represented the stark surprise of the FOMC meeting. June Fed, “said Ray Attrill, head of currency strategy. at NAB.
While these ‘dot charts’ are non-compromises and have a poor track record for rate prediction, the sudden change came as a shock.
The Fed also noted that it would now be considering whether to ‘lower’ its $ 120 billion a month asset purchase program meeting by meeting and reduced the risk of the pandemic given progress with vaccines.
JPMorgan analysts noted that Fed Chairman Jerome Powell had not been as aggressive in his press conference. He had described it as “talk talk about meetings,” a simplistic reference to his protests earlier this year that the Fed wasn’t even “talking about talking” about stricter policy.
“It appears that faster progress towards reopening and higher inflation surprises revealed some hawks in the FOMC, but we suspect that leadership is predominantly anchored at zero or upside in 2023,” JPMorgan said, holding a prediction that the downsizing it will start early next year. .
Markets moved quickly to price in the face of the risk of an earlier action and Fed fund futures turned to imply a first rally by the end of 2022. Yields on 10-year bonds soared almost nine basis points to the end of 2022. 1.57%.
The dollar also broke recent narrow ranges. It was up 0.9% on Wednesday against a basket of currencies at 91.387, its biggest gain since March last year, and set a two-month high in early European trading.
Powell’s aggressive turn led Goldman Sachs and Deutsche Bank to drop their claims that the US currency would weaken against the euro, although others weren’t so sure.
Agnès Belaisch, chief strategist for Europe at the Barings Investment Institute, said that the fact that the Fed did not raise rates in the short term was good for global growth and that therefore currency markets would outperform the change. Wednesday.
“He (Powell) said they wouldn’t do anything for the next two years, so it’s a shock but wrapped up in good news,” Belaisch said. “I think it gave the markets the go-ahead to recover.”
The euro fell back to $ 1.1950 in the European session and the dollar was just shy of its 2021 high against the yen, last buying 110.55 yen.
The kiwi dollar recovered about half of its overnight losses after first-quarter growth figures beat expectations, and while the Australian dollar and the British pound stabilized emerging market currencies weakened.
Ahead for the currency markets is a decision on interest rates from Turkey’s central bank due at 1100 GMT, which has the lira on the brink. Norway’s central bank kept its interest rates at zero, but said a hike was most likely in September.
Elsewhere, rising bond and dollar yields were a double whammy for underperforming gold, which fell to $ 1,810 an ounce after sliding 2.5% overnight.
Oil prices were isolated by the prospect of stronger global demand and still tight supply, with Brent hitting its highest since April 2019 before running into profit-taking and strong headwinds. rise of the dollar.
Brent last fell 0.3% to $ 74.15 a barrel, while US crude also lost 0.2% to trade at $ 71.98.
(Additional reporting by Tom Westbrook in Singapore; edited by Alexander Smith)