EMEA Morning Briefing: Stocks Fall on Hawkish Fed Path Ahead

market wraps

Watch out for:

ECB Economic Bulletin, EU Flash Consumer Confidence Indicator; UK rate decision; France Monthly Business Survey; No major corporate updates expected

Opening Call:

Shares in Europe faced a sharp sell-off on Thursday, following a fall in US indices and a broader fall in Asian stock benchmarks. Treasury yields mostly roses; Dollar and oil stronger; While gold fell.

Equity:

European stocks looked set for sharp losses at the open on Thursday, after the Fed said it would raise the federal-funds rate by 0.75 percent and signal the need for further hikes in the coming months.

Based on the Fed’s so-called dot plot, investors now expect the central bank to eventually raise rates above 4% to beat inflation.

This is much higher than what was expected a few months back and is likely to keep the markets under pressure.

A silver lining for investors was that the Fed did not raise rates by a full percentage point, a scenario that a growing share of traders feared would go ahead at Wednesday’s meeting.

Still, comments from Fed Chair Jerome Powell suggested that the central bank itself does not end its rate hikes anytime soon.

Altaf Kasam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors, said: “Inflation is still too high and has come down too slow for the Fed and other central banks to get their foot out of the gas.” has been.” “We are moving, if not permanently, then at least in the medium term, into an inflationary environment that will require higher rates over the long term.”

“Make no mistake… the Fed wants to reduce inflation to 2% by lowering stock prices,” said Bill Zouks, portfolio manager at Brandywine Global.

In the UK, the Bank of England is set for another hike in interest rates on Thursday.

Post-Fed Reactions:

Ed Al-Husseini of Columbia Threadneedle said the Fed “didn’t really give too many surprises” with today’s 75-basis point growth and economic projections.

Treasury yields rose just after the policy announcement, as did the DXY dollar index, but weakened back to pre-Fed levels.

Al-Husseini expects the Fed to push the economy into a contraction. “The growth of the downward trend is stalling the economy,” to a point where “any event could send you into a recession,” he said.

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The aggressive outlook for monetary policy laid out on Wednesday by Fed Chair Powell is already swaying observers’ monetary policy expectations.

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Bank of America said it expects bigger rate hikes in the future.

“We now expect an increase of 75 basis points in November, a 50 basis point increase in December, followed by two 25 basis points increase by March next year,” the bank said in its new terminal target range. is 4.75-5.0%. Up from earlier 4.0-4.25%.”

Read: Powell doesn’t need to go full Volker to see stock plummet

foreign currency:

Dollar strengthened in Asia on prospects of further Fed rate hikes.

MUFG Bank said overnight, the Fed “hammered home” on top of another large 75-basis-point hike it needs to keep rates longer.

MUFG said ex-Japan currencies in Asia are poised to come under pressure today in view of the hawkish Fed.

Bond:

Treasury yields continued to trade broadly higher in Asia, as the yield on the 2-year note climbed above 4%.

The Fed’s overall message caused investors to raise their forecasts for interest rates in the near term and downgrade them in the longer term.

Zach Griffiths, a senior strategist at research firm CreditSights, specifically referred to the Fed’s interest-rate projections, saying, “There was absolutely hawkish news going on and the Fed went even faster than the market.”

Earlier on Wednesday, yields fell after Russian President Vladimir Putin intensified the war in Ukraine by mobilizing reserve forces and hinting at Russia’s nuclear-weapon capabilities.

However, the decline was modest, and the Fed’s interest rate decision quickly caught the attention of investors.

energy:

Oil futures rose in Asian trading on a potential technical rebound after settling overnight at their lowest level in two weeks on Wednesday, indicating that US crude inventories rose for the third consecutive week.

TD Securities said there has also been a reassessment of Russian exposure overnight.

The energy market narrative is turning to structural strengthening as the market weathers war risks with the Northern Hemisphere winter, TD added.

Read: Why investors should heed Putin’s nuclear saber rattle

Metal:

Gold prices tumbled early Thursday amid a stronger USD and mostly higher Treasury yields following the Fed’s decision.

However, gold’s decline on safe-haven demand spurred by the escalation in the Russo-Ukraine war may have limited gold after Russian President Putin ordered reservists to mobilize and made remarks perceived as a threat to the use of nuclear weapons. can.

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Copper prices edged higher after overnight losses, regaining some ground.

Galaxy Futures said prices may begin to see some pressure following a broader correction trend in recent weeks, as China’s supply crunch is likely to ease.

The brokerage said it is better weather conditions have helped ports to resume operations, while domestic production is also increasing.

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Iron-ore futures in China extended gains amid tight supply and higher demand from peak steelmaking season.

But analysts at Galaxy Futures have advised investors to be cautious in the near term, as the overall commodity trading sentiment is expected to remain muted following the Fed’s decision on Wednesday and the risk-averse outlook is likely to prevail.

Galaxy Futures also flagged weakness in long-term demand amid China’s real estate liquidity crisis.

Today’s top headlines

Fed hikes interest rates by 0.75 percent for third straight meeting

The Washington-Federal Reserve approved a third consecutive interest rate hike of 0.75 percentage points and indicated that additional large increases are likely, even if they are exacerbating recession risks.

Bank of Japan maintains ultralow interest rates

TOKYO – The Bank of Japan kept its ultralow interest rates unchanged on Thursday, staying away from global monetary tightness despite rising inflation.

The decision confirms another policy divergence between the US and Japan, adding downward pressure on the yen. The yen fell to a fresh low of over 145 against the dollar, hitting a 24-year low after the BOJ’s announcement. On Wednesday, the Federal Reserve raised interest rates by 0.75 percent and signaled an additional large increase.

Fed rate decision sends US Treasury yields in different directions

Short-term Treasury yields rose higher on Wednesday, while longer-term yields fell on Wednesday after the Federal Reserve indicated interest rates were likely to climb higher than many investors expected this year.

In a volatile hour of trading, the Treasury yield—which rises when bond prices fall—initially climbed broadly after the Fed released an interest rate forecast. They fell when Fed Chairman Jerome Powell gave a more nuanced view of interest rates and the outlook for the economy, emphasizing the Fed’s commitment to fighting inflation, but also noting that the pace of future rate hikes Depends on the economic data to come.

Russia’s growing threat over Ukraine’s Royal UN meeting

Un-Russian President Vladimir Putin’s threat of a nuclear response to battlefield damage in Ukraine fueled a new sense of urgency ahead of Thursday’s UN Security Council meeting as member states scramble to address the escalating crisis. work and question whether there are longstanding differences between the permanent members. has become a hindrance to global security.

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Mobilizing support among the US and its allies is working to take a stand against Moscow’s latest moves as world leaders gathered this week for the first fully-fledged UN General Assembly since the start of the pandemic Were. Tensions at this year’s gathering appear more intense than in previous meetings after Mr Putin’s recent mobilization of 300,000 reservists and annexed parts of Ukraine, and his nuclear threats.

EU battles Russian narrative on global food crisis

The European Union reversed guidance on how to implement its economic sanctions against Russia, to sidestep Moscow’s allegations that the bloc’s measures are causing a food security crisis in developing countries.

The EU’s executive body, the European Commission, on Monday gave new guidance to member states, making it clear that fertilizers, coal and some other products from Russia can be transferred to the rest of the world through the bloc, and Insurance and other services can be provided on that transportation.

Iran’s president shrugs off Western criticism amid protests for women’s rights at home

Iranian President Ibrahim Raisi has dismissed Western criticism over women’s rights following the death in police custody of a young Iranian woman, as the death toll rose amid growing unrest over the Islamic Republic’s ethics laws.

“We have this double standard where attention is focused entirely on one side and not all,” Raisi said on Wednesday, pointing to the deaths of indigenous women in Canada and Israel’s actions in the occupied Palestinian Territories.

Russia, Ukraine exchange prisoners brokered by Turkey, Saudi Arabia

Officials said Russia and Ukraine released 270 prisoners, including American and British nationals, in agreements reached by Turkey and Saudi Arabia.

In return, Russia released 215 prisoners from its custody, including Ukrainian soldiers, police officers, civilians and others, said Andrey Yermak, the chief of Ukraine’s presidential staff. In return, Russia received 55 Russian and pro-Kremlin Ukrainian politicians, he said.

(more to follow) Dow Jones Newswires

September 22, 2022 00:19 ET (04:19 GMT)

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