Fed rate rise and outlook unsettles markets

Japan’s Nikkei shed over 3% to reach fresh nine-month lows

As investors flocked to the safety of government bonds, the 10-year US Treasuries yield fell below its May 29th low. Photograph: Henry Nicholls/Reuters

As investors flocked to the safety of government bonds, the 10-year US Treasuries yield fell below its May 29th low. Photograph: Henry Nicholls/Reuters

 

Asian shares slid on Thursday after the US Federal Reserve raised rates, as expected, and kept most of its guidance for additional hikes next two years, dashing investor hopes for a more dovish policy outlook.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4 per cent, with Australian shares slipping as much as 1.3 per cent to two-year lows.

Markets across the region are nearing gloomy milestones, with Japan’s Topix and South Korea’s Kospi heading into a bear market, which means they are down more than 20 per cent off their recent highs, to join Shanghai and Hong Kong’s Han Seng.

Japan’s Nikkei shed 3.3 per cent to fresh nine-month lows.

China’s benchmark Shanghai Composite and the blue-chip CSI 300 fell 1.3 per cent and 1.5 per cent, respectively, while Hong Kong’s Hang Seng was off 1.5 per cent.

In New York, the US S&P 500 Index lost 1.54 per cent to hit its lowest level since September 2017. US stocks are on pace for their biggest December decline since 1931, the depths of the Great Depression.

“I think the Fed may be underestimating other factors at play,” said Bob Baur, chief global economist at Principal Global Investors in Des Moines, Iowa in the Unites States.

“Trade has been making headlines, but I think a gradual tightening of monetary policy has been the driving force behind recent market volatility. With corporate borrowing and spending still high, and the Fed continuing to reduce its balance sheet, I’d expect volatility to remain if this tightening continues,” he said.

The Fed raised key overnight lending rate rates by 0.25 per cent point as expected to a range of 2.25 per cent to 2.50 per cent.

It said “some further” rate hikes would be necessary in the year ahead, with its policymakers projecting two rate hikes on average next year instead of three they saw back in September, a change that was also largely in line with expectations.

Slowdown

But the slight revision was not enough to ease market fears over a further US economic slowdown on the back of trade tensions, a waning boost from tax cuts and tightening monetary conditions for companies.

US junk bonds sold off sharply, with their ETFs falling 0.9 per cent, the biggest decline since March 1st.

As investors flocked to the safety of government bonds, the 10-year US Treasuries yield fell below its May 29th low of 2.759 per cent to as low as 2.750 per cent, a level last seen in early April.

A rise in short-term interest rates and a fall in the long-date yield rekindled worries of an inversion in the yield curve, where shorter-debt yields become higher than longer-term ones.

Historically, an inversion between short-yields, such as three-month and two-year yields, and 10-year yields has been seen as a fairly reliable indicator of a recession down the road.

“We expect additional rate hikes will invert the three-months to 10-year yield curve which is a reliable signal for a bear market for stocks and a coming recession for both the US and the rest of the world,” said Jeffrey Kleintop, chief investment strategist at Charles Schwab in Boston.

“So, seriously something to keep a close eye on. We do expect a very difficult year for investors.”

The two-year US yield stood at 2.656 per cent, just 0.097 per cent less than the 10-year yield.

As one 25 basis point rate hike would likely invert the yield curve, many market players are sceptical whether the Fed can raise rates at all next year.

Fed funds futures are now pricing in only about 50 per cent chance of one rate hike.

The dollar bounced back against major currencies after the Fed was perceived to be more hawkish than anticipated.

The euro traded at $1.1383, off Wednesday’s high of $1.14395 hit before the Fed’s policy announcement.

Elsewhere, Oil prices fell on Thursday to erase most of their gains from the day before, resuming declines seen earlier in the week amid worries about oversupply and the outlook for the global economy. – Reuters