Fed points upwards for rates, world stocks lurch downward

Global Stock Markets

World stocks tumbled to one-week lows on Thursday after the U.S. Fed confirmed it was on track to raise interest rates several times this year, sending bond yields to new multi-year highs. 

 

While U.S. 10-year yields retreated after nearing the psychologically key 3 percent level, the minutes of the U.S. Federal Reserve’s meeting at the end of January has at least temporarily taken the edge off investors’ appetite for equities and other assets perceived as risky, such as emerging markets and commodities.

The dollar too was trading just off 10-day highs against a basket of currencies .DXY and was set for its first week of gains this year.

Three rate rises are now almost fully priced in for 2018, compared with two as recently as December, and some traders are even contemplating the possibility of four rate rises in 2018.

Despite all the solid earnings reports, Wall Street saw steep losses on Wednesday after the Fed minutes, and Asian and European markets lost ground too, falling around 1 percent .MIAPJ0000PUS .N225 .

The latter failed to even benefit from robust earnings updates from a series of firms ranging from 

British bank Barclays (BARC.L) to French utility Veolia (VIE.PA). 

MSCI’s all-country equity index .MIWD00000PUS fell 0.4 percent for its third straight day of losses while emerging equities lost 1 percent .MSCIEF.

New York was set for another weak session, futures suggested, with S&P futures down around 0.3 percent ESc1. 

Analysts noted that the January Fed meeting had happened after lawmakers approved a $1.5 trillion package of tax cuts, potentially adding more fuel to an economy which has already picked up steam. 

The 3 percent level on 10-year U.S. yields is seen as a huge psychological milestone for bulls and bears alike. 

In the meantime though the yield, which hit four-year highs around 2.96 percent after the minutes, retreated to 2.92 percent US10YT=RR. Two-year yields touched new nine-year peaks. 

That weighed on euro zone yields, with the German 10-year benchmark DE10YT=RR down one basis point. Yields were also dampened by data showing German business confidence fell more than expected in February, though Europe’s biggest economy is clearly set for solid growth. 

The next hurdle for markets will be minutes from the European Central Bank’s last meeting at 1230 GMT, with investors keen to see if there was more talk of an eventual unwinding of stimulus. 

The “transatlantic spread” between German and U.S. 10-year borrowing costs widened to near a year high at 220 bps, reflecting the diverging monetary policy expectations between the two countries.

Britain however confirmed itself as one of the weak spots in the world economy, with data showing below-forecast 0.4 percent growth in the last quarter of 2017. That pushed sterling 0.2 percent lower against the dollar GBP=, a one-week low. 

The firmer dollar pummeled commodities too - Brent crude futures were down 0.4 percent COc1 while gold and copper prices also fell CMCU3 XAU=.