World equities were heading for their biggest fall in weeks on Thursday after the U.S. Federal Reserve startled investors by signalling it might raise interest rates at a much faster pace than assumed, sending bond yields and the dollar sharply higher.
The dollar added to what was the strongest one-day rise in 15 months after the Fed meeting, while Europe’s government borrowing costs moved higher after 10-year U.S. Treasury yields rose by their most since early March.
Europe’s STOXX 600 snapped a 9-day winning streak – its longest since 2017 – with a 0.3% early dip. Asia-Pacific shares were closing down around 0.7% , while Wall Street futures pointed to a modest 0.4% drop.
The Fed forecasts showed 13 of the 18 person policy board saw rates rising in 2023 versus only six previously, while seven tipped a first move in 2022.
“The new Fed ‘dot plot’ indicating that the median FOMC member now forecasts two Fed rate hikes in 2023, versus none in the March iteration, represented the hawkish surprise out of the June Fed meeting,” said Ray Attrill, head of FX strategy at NAB.
While these ‘dot plots’ are not commitments and have a poor track record of predicting rates, the sudden shift was a shock.
The Fed also signalled it would now be considering whether to ‘taper’ its $120 billion-a-month asset purchase programme meeting by meeting and downgraded the risk from the pandemic given progress with vaccinations.
JPMorgan analysts noted Fed Chair Jerome Powell had not been as aggressive in his media conference. He had described it as a “talking about talking about meeting,” a glib reference to his protestations earlier this year that the Fed was not even “talking about talking about” tighter policy.
“It appears that faster progress toward reopening and higher inflation surprises revealed some hawks on the FOMC, but we suspect that leadership is predominantly anchored at zero or one hike in 2023,” JPMorgan said, sticking with a prediction for tapering to start early next year.
Markets moved quickly to price in the risk of earlier action and Fed fund futures shifted to imply a first hike by the end of 2022. Yields on 10-year bonds shot up almost nine basis points to 1.57%.
The dollar also broke out of recent tight ranges. It had risen 0.9% on Wednesday against a basket of currencies to 91.387 for its biggest gain since March last year and set a two-month high in early European trading.
Powell’s hawkish turn prompted both Goldman Sachs and Deutsche Bank to abandon their calls that the U.S. currency would weaken against the euro, although others were not so sure.
Agnès Belaisch, Chief European Strategist of the Barings Investment Institute, said the fact that the Fed was not going to lift rates any time soon was good for world growth and that FX markets would therefore get over Wednesday’s shift.
“He (Powell) said they wouldn’t do anything for the next two years, so it’s a shock but wrapped in good news,” Belaisch said. “I think he gave the markets the all-clear to rally”.
The euro slipped back towards $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 clawed back about half of its overnight losses after first-quarter growth figures blew past forecasts, and while the Aussie dollar and British pound stabilised emerging market currencies weakened.
Ahead for currency markets is an interest rate decision from Turkey’s central bank due at 1100 GMT, which has the lira on edge. Norway’s central bank kept its interest rates at zero, but said a hike will most likely follow in September.
Elsewhere, the rise in bond yields and the dollar were a double blow for non-yielding gold which was down at $1,810 an ounce after sliding 2.5% overnight.
Oil prices were insulated by the prospect of stronger world demand and still tight supply, with Brent reaching its highest since April 2019 before running into profit taking and headwinds from the sharply higher dollar.
Brent was last off 0.3% at $74.15 a barrel, while U.S. crude lost 0.2% as well to trade at $71.98.
Source: Reuaters (Additional reporting by Tom Westbrook in Singapore; Editing by Alexander Smith)
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