Friday, September 18, 2015

Dovish Fed unnerves global equity markets

from ft.com  



Last updated: September 18, 2015 9:51 pm


A Federal Reserve police officer walks past the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Wednesday, Sept. 2, 2015. Bill Gross said the Federal Reserve has waited so long to raise interest rates that any move now may be labeled "too little too late" as market turmoil restricts the room for policy makers to act. Photographer: Andrew Harrer/Bloomberg©Bloomberg
Stock markets shuddered on Friday, a day after the Federal Reserve expressed concerns about the global economy and decided not to tighten US monetary policy, sending investors rushing for the safety of government bonds.
The S&P 500 index of US stocks closed down 1.6 per cent, its biggest decline since the beginning of September, after the Euro Stoxx 50 gauge tumbled over 3 per cent, led by a decline in the German Dax index.
However, eurozone and UK government bond prices were sharply higher, pushing yields lower, as bond traders caught up with a big overnight rally in the US Treasury market, which was extended even further on Friday. The gold price jumped for a third day running.
While investors and economists were split as to whether the Federal Open Market Committee would finally raise overnight borrowing costs at Thursday’s meeting, a dovish message, focusing on the risk posed by a slowing China and pressure across emerging markets, has shaken sentiment for equities among investors.
“The markets were taken aback by the fact that the Fed ‘held up a mirror’, leaving uncertainties in place,’’ said Francesco Garzarelli, an analyst at Goldman Sachs. “The [Fed] stressed greater macro and financial uncertainties, leaving risk sentiment unsettled.’’
While the dollar fell on expectations that tighter US rate policy does not beckon until 2016, a stronger euro and Japanese yen reflected rising risk aversion among investors.
Nick Gartside, head of international bonds at JPMorgan Asset Management, said investors were watching the level of volatility in global markets and the growth picture in emerging markets.
“If both of these stabilise, and if their respective impact on the US economy remains limited, there’s no reason the Fed can’t hit the lift-off button this year.”
Interest rate forecasts from Federal Reserve policymakers in the so-called “dot-plot” issued alongside the rate call suggested most still expect that the first increase in short-term rates since the financial crisis will happen this year.
But three officials now expect the Fed to hold fire until 2016 with one predicting a negative level for this year and 2016.
That outlook raised the prospect that the European Central Bank could extend its bond-buying economic stimulus programme, or quantitative easing, before the Federal Reserve acts to tighten monetary policy.
“It is now probable that ECB QE2 ultimately arrives before an FOMC rate hike, if our view that the Chinese slowdown is likely to be worse than currently feared is confirmed,” said Michael Michaelides at RBS.
The yield on benchmark 10-year German Bunds fell 12 basis points to 0.66 per cent, the 10-year UK Gilt yield dipped 12bp at 1.83 per cent, and the equivalent US Treasury yield declined 6bp to 2.13 per cent.
“With the Fed removing the immediate ‘hike’ uncertainty and delivering a relatively dovish message, we now expect eurozone fixed income to rally strongly. Our 10-year Bund target remains 0.4 per cent,” added Mr Michaelides.
Guy Dunham at Baring Asset Management said investor uncertainty “reasserted itself” after the Federal Reserve’s decision.
“In the case of risk assets, there was a sense that market participants preferred certainty to uncertainty and just wanted clarity on the precise timing of the change in monetary policy.
“In our view, whilst an interest rate rise is unlikely in October, the Federal Reserve will start to raise rates in December or early 2016,” he said.

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