Stocks Globally Weaken on Hawkish Federal Reserve and Surprising China Data
Frankfurt (June 14) Global stocks traded notably lower Thursday as investors reacted to yesterday's hawkish rate signalling from the Federal Reserve and were caught off-guard by a series of weaker-than-expected data from China that could suggest diverging growth paths between the world's two biggest economies.
The Fed's policy decision, which takes it base lending rate to 2% and marks the seventh increase since 2015, was hardly a surprise for investors, but the upbeat tone from Chairman Jerome Powell during his question-and-answer session with the media, combined with a more robust outlook for growth and inflation, now point to at least two more rate hikes between now and the end of the year.
"The economy is doing very well ... most people who want to find jobs are finding them. Unemployment and inflation are low," Powell said. "The overall outlook for growth remains favorable."
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Curiously, market reaction was slightly counter-intuitive, given that investors have increased their bets on a December rate hike, with Powell's emphasis on growth, as opposed to inflation, helping to weaken the U.S. dollar index by around 0.44% in overnight Asia and European trade to 93.30 and take benchmark 10-year Treasury bond yields from a three-week high of 3.01% to around 2.95%.
U.S. stocks, which slipped modestly last night following the Fed's hawkish rate statement, are set to extend that decline at the opening bell, according to equity futures prices, with contracts linked to the Dow Jones Industrial Average pointing to a flat open while those linked to the S&P 500 suggesting a 0.12-point gain for the broader benchmark.
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However, stock market reaction in Asia was more impacted by a triple-set of economic readings from China that suggest the government's longer-term aim of reducing risky lending practices is starting to take affect, with five-month investment rates falling to a 22-year low of 6.1% and industrial output and retail sales falling much more than anticipated in the month of May.
China's central bank, the People's Bank of China, also elected not to follow the Fed's tighten cycle, as it typically does in order to keep the yuan closely pegged to the U.S. dollar, and kept its short-term interest rate unchanged Thursday, suggesting it's also concerned about the overall trajectory of growth in the world's second-largest economy.
The collective reaction clipped 1.1% from the MSCI Asia ex-Japan index, the region's broadest measure of share prices, and helped push Japan's Nikkei 225 0.99% lower to close at 22,736.11 points.
European stocks followed suit, with the Stoxx Europe 600 falling 0.48% at the start of trading Thursday as investors factored-in both the broader Asia weakness and the wider strength of the euro, which rose to a multi-week high of 1.1819 against the dollar ahead of today's European Central Bank policy meeting in the Latvian capital of Riga.
ECB President Mario Draghi is expected to signal, at least in part, the Bank's intention to end its €2.55 trillion ($3 trillion) quantitative easing program, which has a soft official end-September deadline, now that currency area inflation is starting to accelerate.
Global oil prices were also on the back foot, with the weaker China data offsetting yesterday's bigger-than-expected 4.14 million decline in domestic U.S. crude stocks reported by the Energy Information Administration.
Brent crude contracts for August delivery, the global benchmark, were seen 37 cents lower from their Wednesday close in New York and changing hands at $76.37 per barrel in early European trading while WTI contracts for July were little-changed at $66.64 per barrel.
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