Wall Street sagged in the wake of the US Federal Reserve’s sit and watch decision this morning with major indices dipping further into the red after the central bank issued its statement at 6 am Sydney time.
Despite stronger leads from Asia and European markets (but not Australia which fell 60 points, or 1.2% on Wednesday), Wall Street opened weakly and had meandered its way to small losses ahead of the release of the Fed’s statement.
The Fed didn’t surprise with any action, but some investors worried that the central bank said it is monitoring the volatility in financial markets and developments in overseas economies as the uncertain start to 2016 continued.
Wall Street fell – down by 1.5% at one stage on the Dow, before recovering a touch to close off 1.38%. The Nasdaq lost nearly 2.2% and the S&P 500 was off just over 1%.
Oil prices eased, rose and then eased, other commodities rose – such as iron ore up 3.3% to $US42.43 a tonne, whole rose 0.7% to $US1,127 an ounce and Brent oil was up 3.5% to $US32.75 a barrel. US crude futures were up 1.8% approaching 8am at $US32.02 a barrel.
The ASX futures market was up 23 points when the Fed released its statement just after 6am, and just before 8 am it was off 35 points – so a rough start to trading lies ahead instead of the easier entry expected earlier in the session.
The Aussie dollar traded well above 70 US cents, around 70.50, but retreated towards 8am and was around 70.20. It wouldn’t surprise if it dipped under 70 cents in Asian trading if the negative sentiment carries over into the session.
The US central bank said in its statement that it was assessing what the gyrations around the world meant for the risks facing the US economy, leaving its options open as traders bet policymakers will leave rates unchanged for most of the year.
“The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation," the Fed’s said in a statement that lowered the chances of a rate hike at its next meeting in March.
The Fed also dropped a previous reference from its statement about the risks of the economic outlook being balanced. Instead, the central bank said it was now weighing how the global economy and financial markets could affect the outlook.
The Fed pushed through a landmark interest rate increase in December despite worries within its policymaking committee about stubbornly low inflation, and there was some significant changes in adjectives around the economy in the latest statement – for example, business investment was “strong" in December, now it is "moderate”.
The global economy and market stability has declined markedly since Fed policymakers met in December. The European Central Bank, the Bank of Japan and the Bank of England have all sent out dovish signals in statements in recent weeks, and the Fed sidled down to that level with its statement this morning.
The tenor of the Fed’s statement makes will increase the focus on the release tomorrow night of the first estimate of US 4th quarter economic growth. A weak figure (which could very well be revised away in the second and third estimates) will increase market belief that the Fed will not lift rates again this year.
The statement suggested the Fed does not want to rush to judgment about the implications of the market gyrations.
The steep fall on Wall Street has raised concerns that the markets are signalling a sharp slowdown in the wider US economy this year.
