Global equities slip after Fed comes up short on QE plans

Global equity markets weakened after the Federal Reserve stopped short of promising changes to its massive bond-buying programme, and ahead of Thursday’s Bank of England meeting. European stocks kicked off Thursday in the red with the continent-wide Stoxx 600, as well as markets in Frankfurt and Paris, down 0.6 per cent by mid-morning. London’s FTSE 100 was choppier still, sliding 0.8 per cent. The falls come ahead of a BoE meeting, scheduled for 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 policy decision comes amid rising anxiety about a potential no-deal Brexit.

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 per cent when Wall Street opens later, trimming back early morning losses of almost 2 per cent. 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”. 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. Treasuries were steady in recent trading. The benchmark 10-year yield was nearly unchanged 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.




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