Equities recoiled and the dollar stirred on Thursday after a divided U.S. Federal Reserve dented stimulus hopes, TikTok’s tug-of-war clobbered technology stocks and dire European car sales underscored the persistent impact of the coronavirus.
Traders were also taking in Bank of Japan and Bank of England meetings and plenty of emerging market action, but the tone was set by the events overnight at the Fed and in the trenches of the tech war.
“Those who were expecting more input from Fed monetary policy after the adoption of an average-inflation target regime remained disappointed,” UniCredit analysts wrote in a note.
“While the Fed expects the Fed funds rate to remain flat through 2023, it will need more time to assess the status of the economy and to change its remaining tools accordingly.”
The U.S. central bank extended its ‘dot plot’ forecast of unchanged U.S. interest rates out to end-2023, but went no further. It also upgraded growth forecasts, with GDP now seen reaching pre-COVID levels next year rather than in 2022.
That helped the downtrodden dollar rebound for its best daily rise in over a week against a basket of other top currencies and the euro dip back under $1.18 [/FRX] although U.S. Treasuries and German Bunds were both quiet in early European trading.
Equities markets were choppy, with tech stocks shedding as much as 1.6% after U.S. President Donald Trump said he would ban social media platform TikTok in the United States as early as Sunday if China’s ByteDance didn’t cede control of its U.S. operations. That warning also knocked Chinese heavyweight Alibaba more than 4% lower overnight.
But banks, automakers and miners were the biggest sectoral fallers, all dropping as much as 2%. Volkswagen VOWG_p.DE, Renault and PSA Group fell between 2.5% and 3% after industry data showed European car sales fell by 17.6% in August.
The stronger dollar inflicted some damage in emerging markets too. Turkey’s battered lira hit its latest record low, Argentina announced new capital controls just weeks after its ninth debt restructuring, and there was a third straight day of falls for eastern European currencies.
MSCI’s broadest index of Asia-Pacific shares outside Japan had lost 1% overnight after five straight days of gains while the tech-savvy Nikkei in Japan and KOPSI in South Korea shed 0.6%. and 1.2% respectively.
“In essence, high-tech shares were overbought and we’ve seen a correction since early this month,” said Soichiro Monji, chief strategist at Nishimura Securities in Kyoto. “I think that is still continuing, with the Fed just being a fresh trigger.”
The Fed said it would keep interest rates near zero until inflation is on track to “moderately exceed” the central bank’s 2% inflation target “for some time”.
New economic projections released with the policy statement showed most policymakers see interest rates on hold through to at least 2023, with inflation not breaching 2% over that period.
“Of course, sensible people wouldn’t really hold anyone to macro forecasts that far out so we’ll cross that bridge when we get to it,” said Derek Holt, head of capital markets economics at Scotiabank in Toronto.
“Nevertheless, markets are priced for basically one outcome here and that is little inflation and no hikes for years to come.”
SUB-ZERO CHILL
News the Bank of England had done more work on a possible shift to negative interest rates dunked sterling back under $1.29 again after it lost 3.5% this month following a fresh bout of Brexit chaos.
The Australian dollar lost as much as 0.4% to $0.7278, having erased earlier gains made after stronger-than-expected local jobs data.
The Chinese yuan also dropped about 0.35% to 6.7686 per dollar, stepping back from a 16-month high hit on Wednesday.
The yen hit a 1-1/2-month high of 104.62 to the dollar after the Bank of Japan made no changes to its rates or stimulus.
With focus on new Prime Minister Yoshihide Suga, who is seen by some as a strong opponent of a higher yen, some traders said the market may be tempted to test his resolve on the currency.
“One interesting speculative trade in the near-term will be to long the yen ahead of the coming long weekend in Japan,” said a senior trading manager at a major Japanese bank.
BOJ chief Haruhiko Kuroda had said it would work closely with the Suga government to support the economy.
As the dollar gained, oil prices gave up some of their big gains made on Wednesday on a drawdown in U.S. crude and gasoline inventories, with Hurricane Sally forcing a swath of U.S. offshore production to shut.
Brent crude dropped 1% to $41.80 per barrel before recovering some ground, while U.S. crude fell as much 1.2% before clawing back above $40 per barrel. Gold and bellwether industrial metal copper also slipped nearly 1% to $1,943.8 per ounce and $6,693 a tonne respectively.
