Global stock markets came under pressure on Thursday, with Wall Street dropping further and European shares falling 1 per cent, amid growing concerns over the global economy and the risk that the Federal Reserve will go too far in raising interest rates.
The central bank on Wednesday reduced its forecast for 2019 rate increases, from three quarter point rises to two. Policymakers’ more dovish approach comes amid rising risks across the global economy, from Europe to Asia and the US.
However, some investors had hoped for a more soothing tone from the Fed and its chairman Jay Powell. In a press conference, Mr Powell unnerved markets by saying that he did not see the central bank changing its “autopilot” policy of reducing the size of the Fed’s balance sheet.
“As widely expected, the Fed revised down its outlook for future rate increases and made other dovish changes to its message,” said Zach Pandl, Goldman Sachs economist. “But it was not dovish enough to support markets increasingly driven by concerns over slowing economic growth.”
The sense of unease over the outlook for the US economy was sharpened on Thursday after a survey by the Philadelphia Federal Reserve showed factory conditions in the mid-Atlantic region had improved at the weakest pace in two years this month. It echoed a poll released earlier this week by the New York Fed.
Wall Street stocks declined following the opening bell in New York. The S&P 500 shed 0.8 per cent, leaving the barometer down 2.2 per cent over the past two days.
The pan-European Stoxx 600 index dropped 1.3 per cent, after earlier hitting its lowest level since November 2016. Germany’s DAX shed 1.5 per cent, France’s CAC 40 fell 1.9 per cent, while in London, the FTSE 100 edged lower by a more modest 0.4 per cent.
In Asia, Japan’s Topix index closed down 2.5 per cent. MSCI’s pan-Asian index of stocks outside of Japan fell 1.2 per cent.
Crude oil prices retreated, with Brent crude down 3.9 per cent to $54.99 a barrel at one point. It was the latest in a string of sell-offs that has left the international benchmark down almost 9 per cent for the week to date.
The Fed has led the global charge in tightening interest rates, having boosted its main rate nine times since the cycle began in March 2015. With the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, sitting just below its two per cent target, some analysts have questioned whether the Fed is moving too aggressively amid rising global risks.
“The Fed has not jumped on the slowdown bandwagon,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, referring to expectations among some investors and economists that concerns about a slowing global economy and a pullback in the US stock market might prompt the Fed to trim its plans further for rate increases next year.
In what some strategists see as a sign of rising angst, the difference in short-and-medium term Treasury yields — known as the yield curve — has narrowed dramatically in recent months. It narrowed to 9.3 basis points at its trough on Thursday, near the lowest level since 2007.
“The Fed’s decision to push ahead with its fourth hike of 2018, but shave 25 basis points off its profile for expected hikes, has seen the US 2-10 year Treasury curve flatten further and risk assets suffer,” said Chris Turner, strategist at ING. “The dominant reaction in financial markets has been one of caution.”
In the currencies market, the US dollar slipped 0.5 per cent against a basket of half a dozen developed market peers. The yen posted particularly large gains, up 0.76 per cent on the buck. Japan’s currency typically rises during times of strife as local investors pull funds back into the domestic market.
Gold climbed 1 per cent to $1,259 per troy ounce, marking its largest rise in a month and a half. The yellow metal also shines when investors are seeking shelters and is typically boosted by a weak greenback.
