Global equities slip after Fed fails to move on bond buying programme

European markets retreat as US rates held at historic lows

 

Global equity markets weakened after the Federal Reserve stopped short of promising changes to its massive bond-buying programme.

European stocks kicked off Thursday in the red with the continent-wide Stoxx 600 down 0.8 per cent in early trading. Markets in London, Frankfurt and Paris were all down about 0.9 per cent.

The falls come ahead of a policy decision by the Bank of England, scheduled for later on Thursday, which investors will be watching for further clues on UK monetary policy. Economists expect little change in interest rates or the BoE’s asset purchases, though the meeting comes amid rising anxiety about a potential no-deal Brexit.

Futures

The gloomy start to European trading followed a 0.8 per cent drop for MSCI’s broad measure of stocks in the Asia-Pacific region. Futures markets tipped the US blue-chip S&P 500 index to fall 1.3 per cent when Wall Street opens later.

Investors were left uneasy even after the Fed on Wednesday signalled it would hold rates at historic lows until at least the end of 2023. Several economists said they were surprised the central bank did not hint it would shift to buying more government bonds of a longer maturity to magnify the power of its quantitative easing scheme.

“We interpret the lack of changes to the composition of Treasury purchases to mean that the FOMC does not currently plan to extend the average duration of its purchases, against our previous expectation that it would,” said Jan Hatzius, chief US economist at Goldman Sachs, referring to the policy-setting Federal Open Market Committee.

“We now think that some additional trigger - such as a disorderly rise in yields at longer maturities or a deterioration of the economy - would likely be required,” he said.

Jim O’Sullivan, chief US macro strategist at TD Securities in New York, said the Fed’s policy statement was “modestly less dovish than we anticipated” and that traders in the US Treasury market had been left “disappointed by the lack of stronger guidance on asset purchases”.

Stimulus

Central bank stimulus has been a crucial pillar of the global equity rally that has propelled the MSCI’s gauge of developed and emerging market stocks up 50 per cent since the nadir in March. That means markets have tended to be highly sensitive to even minor discrepancies between policy announcements and consensus expectations.

This is particularly important in the US where lawmakers in Congress have remained at loggerheads over further fiscal stimulus measures to buttress the world’s biggest economy.

“The onus on creating growth and inflation does really fall to fiscal policy,” said Kerry Craig, global markets strategist at JPMorgan Asset Management, adding that “bipartisan politics in Washington” meant a new stimulus package might not come until the new year.

On Thursday, traders shifted into Treasuries, traditionally seen as a haven asset, pushing yields lower across maturities. The benchmark 10-year yield was recently down 0.002 percentage points at 0.685 per cent after ticking up the previous day directly following the Fed announcement.

The dollar index fell 0.3 per cent on Thursday, having edged up overnight, while both the UK pound and euro came under modest pressure.

Stake

Elsewhere, Chinese technology stocks fell after US president Donald Trump suggested he opposed China’s ByteDance keeping a majority stake in video-sharing platform TikTok as part of a proposed deal with Silicon Valley’s Oracle.

“I mean, just conceptually, I can tell you I don’t like that,” Mr Trump told reporters.

Alibaba’s Hong Kong-traded shares fell 2 per cent while rival Tencent shed 1.7 per cent.

The Bank of Japan kept interest rates unchanged on Thursday. – Copyright The Financial Times Limited 2020