Global Stock Markets Close Mixed As Dollar Shines

Global stocks were mixed on Thursday, September 21, as U.S. dollar shone while Asian shares slipped after the U.S. Federal Reserve announced a plan to start shrinking its balance sheet and signalled one more rate hike later this year.

European shares are expected to benefit from a fall in the euro against the dollar with spread betters looking at a higher opening of 0.5 percent in Germany’s DAX .GDAXI and France’s CAC .FCHI.

Japan’s Nikkei .N225 gained 0.2 percent as a rise in U.S. bond yields lifted financial shares, while the yen’s fall against the dollar after the Fed’s decision helped exporters.

The Bank of Japan, as widely expected, left its policy settings unchanged, with markets awaiting a news conference by its governor later in the day.

MSCI’s broadest dollar-denominated index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.5 percent, with Australian shares among the hardest hit with fall of 0.8 percent.

Major U.S. share indexes recovered quickly from initial losses following the Fed’s announcement, with the S&P 500 .SPX ending slightly higher, helped in part by gains in financials .SPSY and energy shares .

The Fed’s view also prompted a rotation from tech shares into financial shares, which benefit from higher interest rates, he added.

“In a way, what the Fed did was not much of a surprise. From now, the markets will be focusing on individual earnings rather than macro themes,” said Hisashi Iwama, senior portfolio manager at Asset Management One.

As expected, the Fed said it would begin in October to trim its massive holding of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

The Fed signalled it still expects one more interest rate hike by the end of the year, despite a recent bout of low inflation, but ratcheted down its long-term interest rate forecasts.

Fed fund rate futures FFF8 are now pricing in about a 65 percent chance of a rate hike by December compared to around 50 percent before the latest meeting. Markets expect the Fed move to coincide with revisions of its economic projections.

The yield on two-year U.S. Treasury notes jumped to 1.451 percent US2YT=RR, its highest level since November 2008 late on Wednesday. The 10-year U.S. Treasuries yield US10YT=RR rose to 2.278 percent, briefly hitting a six-week high of 2.289 percent.

“The markets reacted to the Fed quite straightforwardly, with shorter yields rising more than long-dated bond yields. The bond markets have fairly strong conviction that low inflation and low growth will persist,” said Hiroko Iwaki, senior strategist at Mizuho Securities.

In the currency market, the rise in Treasury yields boosted the dollar’s attractiveness. The euro EUR= dropped to $1.1883 from above $1.20 just before the Fed’s policy announcement.

Likewise the dollar jumped to 112.595 yen JPY=, a two-month high, from around 111.30.Gold XAU= also hit a three-week low of $1,296 per ounce.

 

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