Dovish Fed Fails To Stimulate Stock Markets
- Fed leaves rates unchanged with a very dovish tone
- Global equities surprisingly see negative trading after dovish Fed
- USD weakens vs. major currencies
- Bonds, gold surge on accommodating monetary outlook
- Evidently, the more probable outcome did take place last week, as the Fed, refrained from hiking its key policy rate. Other signals from the Fed’s rate announcement were distinctively dovish. These include the statement saying that recent financial developments “may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”, lowering the long-run outlook for the Fed’s rate to 3.5%, from 3.8% in June, the number of FOMC participants seeing the Fed’s rate below 0.5% at the end of 2015 jumping to 11 from just 7 in June’s forecast and one FOMC participant actually predicting rates to turn negative at by the end of the year. Though on the other hand, it also said that one FOMC member, Jeffrey Lacker, voted in favor of raising the federal funds rate immediately, by 0.25%. The following press conference with Governor Yellen provided more of these remarks. Inter alia she said that “actual policy actions over time will depend on how economic conditions evolve, which is quite uncertain”, thus leaving open the possibility to avoid liftoff for a prolonged period of time.
- Considering the fact that futures on the Fed's interest rate priced-in approximately 30% probability for a rate hike, stock market response to the announcement has been quite disappointing. In a counter-intuitive move, the S&P 500 (SPY) actually took a small, roughly 0.7%, dip on the Fed's 'unchanged' statement although it recovered from it soon after. Markets enjoyed an extra boost as Yellen unleashed her dovish agenda at the press conference, peaking to as much as a 1.3% gain compared to the opening of the day, at some point. Sentiment, however, took a downturn from there and the S&P finished the day losing some 0.26%. The Dow (DIA) also had a negative rate-announcement day, losing a total of 0.39% and the Nasdaq (QQQ) added merely 0.1%. The negative domino effect continued in other markets, with the Nikkei 225 losing close to 2% on Friday's session. Europe, too, suffered a negative Friday, as the DAX lost over 3% during the day and the CAC 40 decreased close to 2.6%. Similarly, the FTSE 100 lost some 1.34% on Friday.
- Most assets perform as expected.
- Aside from equities, much of the rest of financial assets, globally, responded as one might expect. Bond prices have increased, which meant that their yields were trading lower. The U.S. 10 year went from close to 2.3% at the start of Thursday's session, to around 2.19% by the end of it, and down another 6bp on Friday, to 2.13%. Likewise, the USD weakened substantially with EUR/USD increasing close to 1.3% on Thursday's session, though much of this dispersed the following day. Similarly, EUR/GBP increased some 0.66% during Thursday. Gold benefited significantly from the Fed announcement, seeing it add approx. 0.7%, followed by another 0.7% or so as Yellen continued to disperse dovish remarks.
Disclosure: None.
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