Asian stocks stutter after rude awakening from Fed on US economy

The Fed predicted the US economy would shrink 6.5 percent this year in a challenge to recent market optimism.

US New York
Closed businesses in New York during the coronavirus shutdown last month. A downbeat assessment from the Federal Reserve has hit stocks [Justin Lane/EPA]

Asian shares dropped on Thursday and bonds rallied after a downbeat economic outlook from the United States Federal Reserve undermined recent market optimism and fuelled expectations recovery would require even more stimulus measures.

After a slow start, MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 1.1 percent, potentially putting an end to a 10-session winning streak.

Japan’s Nikkei slid 2.1 percent as the yen firmed, though Chinese blue chips managed to hold steady.

E-Mini futures for the S&P 500 fell 1.1 percent, while EURO STOXX 50 futures lost 2.2 percent and FTSE futures 1.6 percent.

In a challenge to the stock market’s recent optimism, the Fed predicted the US economy would shrink 6.5 percent in 2020 and unemployment would still be at 9.3 percent at year’s end.

Data released earlier had also shown core US consumer prices fell for a third straight month in May, the longest stretch of declines on record.

As a result, Fed Chair Jerome Powell said he was “not even thinking about thinking about raising rates”. Instead, he emphasised recovery would be a long road and that policy would have to be proactive with rates near zero until at least 2022.

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“While Powell did not commit to any new action at this time, his focus on downside risk and uncertainty reinforces the message that they will take further action, probably by September,” was the take of economists at JPMorgan.

“Outcome or calendar-based guidance looks likely and Powell left the door open for moving to some form of interest rate caps.”

Powell confirmed the Fed was studying yield curve control, a form of easing already employed by Japan and Australia.

All of which, saw yields on 10-year Treasuries fall 9 basis points on Wednesday, the biggest daily drop in almost two months. Yields were down at 0.71 percent on Thursday, a sharp rally from last week’s peak of 0.96 percent.

Dollar pressure

The risk of more easing initially had the US dollar under pressure, seeing it touch a three-month low on a basket of currencies at 95.714.

“The Fed’s view – that you’ll be paid almost nothing for holding US dollars until at least 2022 – is never going to be helpful for any currency,” noted analysts at CBA.

The dollar later steadied as risk appetite waned and stocks came off. It was last at 107.03 yen, after hitting a one-month trough at 106.87.

The euro edged back to $1.1346 having hit its highest since mid-March on Wednesday at $1.1422.

The prospect of super-low rates for longer was a boon for gold overnight, leaving it at $1,731 an ounce.

Oil prices turned lower after US data showed crude inventories had risen to record highs.

Brent crude futures fell $1.18 to $40.55 a barrel, while US crude lost $1.32 to $38.28.

Source: Reuters