Wall St decline nears Depression-era levels
AUSTRALIAN shares are set for a tumble at the open after a fresh rate hike by the US Federal Reserve sent Wall Street stocks deep into the red.
The SPI200 futures contract was down 28 points, or 0.5 per cent, to 5,570.0, at 0800 AEDT on Thursday, pointing to an opening drop for the benchmark ASX/200 as US stocks fell hard in late overnight trade.
Global markets gave up earlier gains after the Fed announced another interest rate rise, adding that "some" further rate hikes would be necessary in the year ahead.
On Wall Street, The Dow Jones fell 386.68 points, or 1.63 per cent, to 23,288.96, the S&P 500 fell 34.8 points, or 1.37 per cent, to 2,511.36 and the Nasdaq Composite shed 161.74 points, or 2.38 per cent, to 6,622.18. US stocks are on track for their biggest December decline since the Great Depression in 1931.
Meanwhile, the Aussie dollar has extended its losses, hitting a new seven-week low 71.04 US cents, down from 71.93 US cents on Wednesday.
In local finance news on Thursday, Dulux Group and Incitec Pivot are scheduled to hold their annual general meetings, while November's Labour Force figures are due from the Australian Bureau of Statistics at 1130 AEDT.
GLOBAL STOCKS SINK AFTER FED HIKES RATES
- David Randall, Reuters
Global equity markets have given up earlier gains and continued a weeklong sell- off after the US Federal Reserve announced a fresh interest rate hike and said "some" further rate hikes would be necessary in the year ahead.
The decision, announced at 2pm local time (6am AEDT), slashed more than 700 points off of the Dow Jones Industrial Average and sent MSCI's index of global stocks down nearly 0.9 per cent for the day.
The index is down nearly 13 per cent since the start of December due to concerns that global economic growth is slowing.
"This is clearly a disappointment for those hoping for a dovish rate hike," said David Joy, chief market strategist at Ameriprise Financial in Boston. "It is a more moderate rate hike but it is a rate hike and there is still a gap between where the Fed is and where the market is in terms of policy expectations for next year."
On Wall Street, the Dow Jones Industrial Average fell 351.98 points, or 1.49 per cent, to 23,323.66, the S&P 500 lost 39.2 points, or 1.54 per cent, to 2,506.96 and the Nasdaq Composite dropped 147.08 points, or 2.17 per cent, to 6,636.83.
US stocks are on pace for their biggest December decline since 1931, the depths of the Great Depression.
Fed Chair Jerome Powell's remarks added to the selling pressure in US stocks when he said the pace of the balance sheet reduction is on a preset course and adjusting the pace of the balance sheet reduction is not an option at this time.
The US central bank's rate hike will likely dampen investor appetite for riskier assets throughout the globe, said Jorge Mariscal, emerging markets chief investment officer at UBS Global Wealth Management.
"People are worried about growth and to hear the Fed isn't (worried) concerns the market," he said. "In turn, that supports the US dollar and that is negative news for emerging markets in general."
The latest jolt on the growth front came from Japan, which said its export growth slowed to a crawl in November, an ominous signal for the trade-focused economy.
Logistics and delivery firm FedEx Corp, considered a bellwether for the world economy, slashed 2019 forecasts, noting "ongoing deceleration" in global growth. The company's shares sunk over 12 per cent, pushing its stock down nearly 35 per cent since the start of the year.
"It's a confluence of several important factors: the market is adjusting its outlook on growth and there is a consensus we will see a slowdown. More importantly, the market is adjusting to the idea this will translate into lower earnings growth," said Norman Villamin, chief investment officer for private banking at Union Bancaire Privee in Zurich.
Expectations of slower growth and the equity sell-off have sent 10-year Treasury yields to their lowest since August. Benchmark 10-year notes last rose 16/32 in price to yield 2.7655 per cent, from 2.823 per cent late on Tuesday.
Yields in Japan and Australia also reached multi-month lows. The dollar index fell 0.02 per cent, with the euro up 0.08 per cent to $1.137.
FED LIFTS RATES FOR FOURTH TIME THIS YEAR
- Associated Press
The Federal Reserve has raised its key interest rate for the fourth time this year to reflect the US economy's continued strength but signalled that it expects to slow its rate hikes next year.
Wednesday's quarter-point increase, to a range of 2.25 per cent to 2.5 per cent, lifted the Fed's benchmark rate to its highest point since 2008. It will mean higher borrowing costs for many consumers and businesses.
The Fed's move came despite President Donald Trump's attacks in recent weeks on its rate hikes and on Chairman Jerome Powell personally.
The president has complained that the moves are threatening the economy. At a news conference after the Fed's announcement, Powell said Trump's tweets and statements would have no bearing on the central bank's policymaking.
The statement the Fed issued Wednesday after its latest policy meeting said "some" further gradual rate increases are likely; previously, it referred simply to "further gradual increases". Its updated forecast projects two rate hikes next year, down from three the Fed had predicted in September.
US stocks had been sharply higher before the Fed's announcement but began falling afterwards and then accelerated into a plunge during Powell's news conference.
The Dow Jones industrial average was down about 400 points soon after the news conference ended. But bond prices rose, sending yields lower.
The central bank has raised rates with steady regularity as the US economy has strengthened. Wednesday's was the Fed's ninth hike since it began gradually tightening credit three years ago.
But a mix of factors - a global slowdown, a US-China trade war, still-mild inflation, stomach-churning drops in stock prices - has led the Fed to consider slowing its rate hikes in 2019 to avoid weakening the economy too much.
It's now likely to suit its rate policy to the latest economic data - to become more flexible or, in Fed parlance, "data- dependent".
The Fed has so far managed to telegraph its actions weeks in advance to prepare the financial markets for any shift. But now, the risks of a surprise could rise.
Next year, Powell will begin holding a news conference after each of the Fed's eight meetings each year, rather than only quarterly. This will allow him to explain any abrupt policy shifts. But it also raises the risk that the Fed will jolt financial markets by catching them off guard.
At his news conference, Powell acknowledged the shift in the Fed's communications strategy. Powell said future rate decisions will likely depend more on newly released economic data than in the recent past. "We're going to let incoming data inform us," he said.
Some analysts say the Fed may want to pause in its credit-tightening to assess how the economy fares in the coming months in light of the headwinds it faces.
Contributing to this view was a speech Powell gave last month in which he suggested that rates appear to be just below the level the Fed calls "neutral", where they're thought to neither stimulate growth nor impede it. Powell's comment suggested that the Fed might be poised to slow or halt its rate hikes to avoid weakening the economy.
For now, most US economic barometers are still showing strength. The unemployment rate is 3.7 per cent, a 49-year low. The economy is thought to have grown close to 3 per cent this year, its best performance in more than a decade.
Consumers, the main driver of the economy, are spending freely. After the two rates increases that the Fed now envisions for next year, it foresees one final hike by 2020, which would raise it benchmark rate to 3.1 per cent. By 2021, four Fed officials envision reversing course and actually cutting rates to help stimulate the economy.
The new forecasts also reduce the long-run level for the Fed's benchmark rate to 2.8 per cent from 3 per cent. In doing so, the Fed is signalling that it doesn't need to tighten credit much further to keep the economy from overheating.
Its statement described the economy as strong. But it did note potential threats by adding language to say it would monitor global developments and assess their impact on the economy.
In its updated outlook, the Fed lowered its forecast for growth next year to 2.3 per cent from the 2.5 per cent it foresaw three months ago. It predicts 2 per cent growth in 2020. Those estimates are far below the Trump administration's insistence that its tax cuts would help accelerate annual growth to 3 per cent in coming years.
Given the still-healthy US economy, the Fed would normally keep gradually raising rates to make sure growth didn't overheat and ignite inflation. But this time, the risks to the economy seem to be rising.
From China to Europe, major economies are weakening. Trump's trade conflict with Beijing could, over time, undermine the world's two largest economies.
There are also fears that the brisk pace of US growth this year reflected something of a sugar high, with the economy artificially pumped up by tax cuts and a boost in government spending.
The benefit of that stimulus will likely fade in 2019, slowing growth to a more modest pace. And as US interest rates have risen, loan-sensitive sectors of the economy, from housing to autos, have begun to weaken.
In addition, the Fed has been gradually shrinking the vast portfolio of Treasury and mortgage bonds it built up after the 2008 financial crisis. This process is thought to have had the effect of putting further upward pressure on borrowing rates for consumers and businesses.