Global equities slip after Fed comes up short on QE plans

Global equity markets slid further on Thursday after the US Federal Reserve stopped short of promising changes to its massive bond-buying programme and the Bank of England held rates steady.

The US blue-chip S&P 500 index was down 0.6 per cent around lunchtime on Wall Street, extending Wednesday’s loss of 0.5 per cent. The tech-heavy Nasdaq Composite had a choppier start still, falling 1 per cent following Wednesday’s decline of 1.7 per cent.

Tech giants weighed particularly heavily on markets, continuing a volatile few weeks for the sector. Tesla and Amazon were down 2 per cent and Apple and Microsoft also edged lower.

The falls prolonged a day of gloomy trading in which European and Asian markets sank lower.

Investors were left uneasy even after the Fed on Wednesday signalled it would hold rates at historic low levels until at least the end of 2023. First-time jobless claims from Americans who found themselves newly unemployed also declined less than expected for the week ending September 12, to 860,000 from 893,000 the week before.

Several economists said they were surprised the Fed did not hint it would shift to buying more government bonds of a longer maturity to magnify the power of its quantitative easing scheme.

“We interpret the lack of changes to the composition of Treasury purchases to mean that the FOMC does not currently plan to extend the average duration of its purchases, against our previous expectation that it would,” said Jan Hatzius, chief US economist at Goldman Sachs, referring to the policy-setting Federal Open Market Committee.

“We now think that some additional trigger — such as a disorderly rise in yields at longer maturities or a deterioration of the economy — would likely be required,” he said.

Jim O’Sullivan, chief US macro strategist at TD Securities in New York, said the Fed’s policy statement was “modestly less dovish than we anticipated” and that traders in the US Treasury market had been left “disappointed by the lack of stronger guidance on asset purchases”.

Central bank stimulus has been a crucial pillar of a global equity rally that has propelled the MSCI’s gauge of developed and emerging market stocks up 50 per cent since the nadir in March. That means markets have tended to be highly sensitive to even minor discrepancies between policy announcements and consensus expectations.

In the UK, the central bank’s Monetary Policy Committee voted on Thursday to keep interest rates at 0.1 per cent, in line with expectations, and not to increase its asset purchase programme. But “the outlook for the economy remains unusually uncertain”, warned the MPC.

Sterling fell 0.5 per cent to trade at $1.2902 after the rate-setting committee said it had been briefed on the BoE’s plans to explore how a negative interest rate “could be implemented effectively” should conditions warrant it.

Europe’s Stoxx 600 benchmark was down 0.4 per cent, having fallen as much as 1 per cent earlier in the day, while the UK’s FTSE 100 slipped 0.4 per cent and the German Dax was down 0.2 per cent.
In the US, lawmakers in Congress have remained at loggerheads over further fiscal stimulus measures to support the world’s biggest economy.

“The onus on creating growth and inflation does really fall to fiscal policy,” said Kerry Craig, global markets strategist at JPMorgan Asset Management, adding that “bipartisan politics in Washington” meant a new stimulus package might not come until the new year.

Treasuries were steady in recent trading. The benchmark 10-year yield was down slightly at 0.6740 per cent after ticking up the previous day following the Fed announcement.

The dollar index, which measures the greenback against a basket of peers, was flat by Thursday afternoon in London, reversing the morning’s earlier losses.

In the Asia-Pacific region, Japan’s Topix index closed down 0.4 per cent, while China’s CSI 300 closed 0.5 per cent lower.

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