It won’t be a pretty sight on Australian and other Asian stockmarkets today – watch for losses and some volatile trading after the Fed’s decision to leave US rates alone.
Futures trading overnight pushed the ASX 200 contract up 70 points at one stage, but those gains were lost in the aftermath of the Fed’s decision, and the local market will start around five points lower after Wall Street ended confused
The US sharemarket got it right, sort of, but in the end didn’t like its choice and what it reflected – growing doubt about global markets and the US economy, especially inflation, which is now not expected to return to the Fed’s 2% target until 2018 – three months ago it was 2017.
The US bond market didn’t pick the Fed’s hesitant decision not to lift rates. But if you thought this set off any market surge, then you were wrong and yields plunged as investors worried and sort safety.
Second and third thoughts prevailed and US equities ended lower and very mixed.
But being right didn’t produce an exuberant surge in buying on Wall Street and it was a volatile, worried end to the session.
The S&P 500 jumped to 2,020 during Fed chair, Janet Yellen’s news conference, but lost all those gains to close 5.11 points, or 0.3%, lower at 1,990.20. The Dow rose as much as 190 points, but finished 65.21 points, or 0.4%, lower at 16,674.74. But the Nasdaq ended the day, up 4.71 points, or 0.1% at 4,893.95, but not certain.
US bond yields slid sharply from the sharp rises seen on Wednesday as investors moved into the security of the world’s biggest market.
The yield on the two-year Treasury note plunged 10.9 basis points to 0.702%, from just over 0.8% on Wednesday (which was a near five year high. The fall was its largest one-day drop in over five years.
Yields on 10 year bonds dropped 0.11% to 2.19% and the yield on the one-month Treasury bill turned negative at -0.015% for the first time in nearly three months, marking a new one-year low, according to Marketwatch.com.
The vote was 9 to 1 on the Fed’s Open Markets Committee not to lift rates. It wasn’t domestic factors that influenced the decision, instead it was, somewhat surprisingly, the international outlook of slowing growth, oversupplied commodities and weak prices and fears about China.
So the Fed maintains its record low federal funds rate in the range of zero to 0.25% for another six weeks. Some economists say a December rate rise might happen, others are saying early 2016.
The Australian dollar charged higher, approaching 73 US cents, then settled back to trade around 72.30 and up a third of a cent, and then it too fell sharply, back under 72 US cents very quickly and down to around 71.67 and looking to head even lower.
The tone on markets has changed dramatically this morning and don’t be surprised to see the Fed’s move as the start of a period of wider instability and sell downs.
With this one comment the Fed has changed market perceptions:
"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Fed said in its policy statement at the end of a two-day meeting. It added the risks to the US economy remained nearly balanced but that it was “monitoring developments abroad."
That leaves the Fed meetings in October and December for a rate rise. Don’t expect a rate rise then unless there’a significant surge in US inflation a or inflationary expectations, and an improvement in the global outlook with market instability easing.
Yesterday’s 2.1% fall in the Shanghai market (in a late fall, unlike previous days which have seen late rallies) was a reminder of what the Fed is worried about.
