Stock markets were knocked on Thursday after the US Federal Reserve signalled it was not immediately prepared to deploy further unconventional measures to shore up the world's biggest economy.
Equities in Europe and Asia sustained selling pressure after a summary of the US central bank’s July meeting indicated “many” members of its policy-setting committee were unwilling to launch measures that would attempt to place a cap on yields of US government bonds.
Rebound
Europe’s Stoxx 600 index declined 1.4 per cent in early trading on Thursday as indices in London, Paris and Frankfurt dropped. MSCI’s broad gauge of Asia-Pacific stocks shed 1.6 per cent while futures tracking Wall Street’s S&P 500 suggested the index would fall around 0.7 per cent.
The rebound in global markets since a rout in February and March, which took Wall Street stocks to record peaks this week, has been supported by a flood of stimulus from global central banks.
The Fed has cut interest rates to historic lows, launched a massive bond-buying programme and taken other measures to steady America’s financial markets that were badly strained during the worst points of the sell-off.
However, market sentiment was dented by indications in the Fed minutes that showed many central bankers believed so-called yield curve control was not “warranted in the current environment”. The Fed’s reluctance to signal it will not raise interest rates or ease its bond buying until certain economic thresholds are reached also caused unease.
“The FOMC minutes surprised in indicating that yield curve control was not in the near-term set of policies that the Fed would adopt,” said Steve Englander, head of North American macro strategy at Standard Chartered.
“Fixed-income investors probably saw this both as hawkish relative to expectations and as raising expected rates volatility.”
Oscar Munoz, rates strategist at TD Securities, added that “the market is priced for easing on forward guidance and QE, so the lack of a ‘clear green light’ was a disappointment”.
Still, Standard Chartered’s Mr Englander said: “We do not see the minutes as negatively as did the market.”
He said investors would look ahead to the upcoming Jackson Hole Economic Symposium, typically a platform for significant policy announcements, and the Fed’s upcoming meeting in September for further clues on the central bank’s plans.
Policy
The bout of concern over monetary policy comes as several potential worries bubble in the background. US stocks are now priced at more than 22 times expected earnings over the next year, according to FactSet, levels not seen since the dotcom bubble burst two decades ago.
At the same time, tensions between the US and China ratchet higher, American elections are just months away and many countries particularly in Europe have reported a resurgence in Covid-19 cases.
The European Central Bank will on Thursday deliver an account of its July meeting, providing further information on policymakers' discussions about propping up the eurozone economy.
In fixed-income markets, US Treasuries gained in price amid the selling in riskier portions of the market, pushing the 10-year yield down 0.03 percentage points to 0.653 per cent. UK gilts and German Bunds also advanced slightly in price.
The dollar ticked 0.2 per cent higher against six major peers, its second-straight day of gains after a five-day decline that brought it to the lowest level in more than two years. Sterling slipped 0.1 per cent to $1.3079, having on Wednesday moved close to its high of the year. – Copyright The Financial Times Limited 2020
