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GLOBAL MARKET OVERVIEW
Last updated: January 28, 2016 8:55 am
Stocks mixed after Fed holds its ground
Jamie Chisholm, Global Markets Commentator
Thursday 08:30 GMT. Major equity gauges are mixed, while the dollar is a touch firmer as traders absorb the latest update on Federal Reserve thinking amid steadier energy prices.
The pan-European Stoxx 600 is up 0.2 per cent after Japan’s Nikkei 225 shed 0.7 per cent and China’s stock market fell to fresh 13-month lows.
Sentiment in Asian bourses were hit by Wall Street’s stumble late on Wednesday. Index futures suggest the S&P 500 on Thursday will climb 17 points to 1,900, but the US stock benchmark dropped 21 points in the previous session after some traders expressed disappointment that the Fed appeared less dovish than the market had hoped.
After keeping interest rates unchanged at 0.25-0.5 per cent, as had been expected, the Federal Open Market Committee’s accompanying statement acknowledged recent market turmoil but contained little to suggest it had shifted its stance on raising interest rates possibly four times this year.
Futures markets are suggesting there may be just one 25 basis point rate increase in 2016 and some investors were hoping the FOMC would adjust its outlook accordingly.
“If markets were looking for comfort from the FOMC, and a vindication of the much more benign rate path they have factored in for the Fed’s rate trajectory, then there were some straws to clutch at in the statement, but less than many might have hoped for,” said Marc Ostwald, strategist at ADM Investor Services International.
“Market reaction can probably be best described as sulking, with equities putting in a poor performance,” he added.
But Millan Mulraine, deputy chief US macro strategist at TD Securities, thought the Fed’s downgrade in its economic growth and inflation assessments meant the “overall tone of the January statement was relatively dovish”.
“It signals that any future action will depend crucially on the evolution in the data. In that regard, our confidence in a March hike has diminished further.”
Moves in the bond markets suggest investors are unsure which argument to favour.
Treasuries are steady, with 10-year yields at 2.00 per cent and the more policy-sensitive 2-year a fraction of a basis point softer at 0.84 per cent.
Equivalent maturity German paper is down 1bp to 0.43 per cent and up 1bp to minus 0.44 per cent — pressured by expectations of more European Central Bank buying. That large yield differential in favour of the US is continuing to underpin the greenback.
The dollar index is up 0.2 per cent to 99.07, leaving it just 1.5 per cent shy of the 12-year peak touched last month. The stronger buck is in turn causing gold to retreat from a two-month high, losing $8 to $1,117 an ounce.
The market’s fresh focus on the Fed provided relief from its infatuation with oil prices. The S&P 500’s fall on Wednesday marked the first session in 10 that it had not matched the direction of Brent crude, which rallied sharply on rumours of co-ordinated production cuts just as the Fed factor hit equities.
Equity bulls will be hoping the previously tight oil/stock correlation has not snapped quite yet because energy is showing resilience again. Brent, the international benchmark, is up 0.5 per cent to $33.27 a barrel, while the US-based WTI contract is up 0.1 per cent to $32.32.
In China, suggestions that policymakers should consider imposing capital controls have swirled in recent days, and provided the backdrop for a pullback in stocks.
The Shanghai Composite index lost another 2.9 per cent to close at its lowest level since December 2014.
The SCi has shed 25 per cent already in 2016, with worries about prospects for the renminbi taking a toll on sentiment.
The People’s Bank of China set the reference rate around which the renminbi is allowed to trade stronger by 0.01 per cent to Rmb6.5528 per dollar. The incremental move marked the fifth day in a row the currency has been allowed to strengthen, and the longest such streak since mid-October.
The reference rate softened by 1.4 per cent in eight consecutive sessions after Christmas, triggering a sell-off that handed global markets their worst start to a year in decades.
Concerns that the PBoC’s moves earlier this year marked the start of push to devalue the currency have been overblown, according to analysts at HSBC.
“The country’s main challenge is a deflating domestic construction bubble. To put a floor under that, extra monetary and fiscal easing is required, not tinkering with the currency, which would only make reflating the domestic economy more difficult by accelerating capital outflows,” they said.
Elsewhere in currency markets, the Japanese yen is flat at Y118.73 per US dollar after data showing retail sales fell in December.
Investors are turning their attention to the Bank of Japan’s policy meeting on Friday and although many analysts still think the BoJ will need to ramp up its stimulus programme, they do not think that it will happen this week.
The New Zealand dollar is up 0.4 per cent at US$0.6459 after the Reserve Bank of New Zealand held its key interest rate at 2.5 per cent. However, the central bank acknowledged that the risks to domestic growth and inflation have risen in recent weeks owing to volatility in financial markets and uncertainty over the strength of China’s economy.
Additional reporting by Peter Wells in Hong Kong
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