The US central bank raised interest rates by 25 basis points (0.25%) this week, as expected, and lowered its forecast for further ‘Fed Funds’ increases in 2019 to two from three. But despite the downward interest rate revision, Fed Chairman Jay Powell’s comments in the post-meeting press conference were not seen as being as ‘dovish’ (soft) as many had hoped. Moreover, he said the reduction of the Fed’s balance sheet would remain on ‘autopilot’.
(The Fed has built a 4 Trillion dollar balance sheet by buying multiple bonds and securities from distressed financial institutions since the financial crisis. Buying such bonds provides liquidity to financial institutions and the markets so supporting asset prices. If the Fed reduces this balance sheet they are withdrawing liquidity support to the same financial markets and asset prices – so the market did not like this news!)
The stock markets remain concerned about:
-the general rise in bond yields/interest rates
-trade tension between US and China and a move to global protectionism
– a belief that we are at the latter stages of a multi-year bull market and a 2020 US recession is a distinct possibility.
The S&P 500 is 16% down from its record peak it reached in September.
NASDAQ (the technology index is down 20%)
The dollar index fell to its lowest point for a month this week in response to the shallower path of tightening forecast by the Federal Reserve.However, the dollar has generally been strong over the last several months causing a major problem for Emerging Market countries who have borrowed heavily in USD over the last several years. As the dollar strengthens, servicing this debt (via interest and principal repayments) becomes increasingly harder to do in local curency terms.Turkey and Argentina have been particularly hard hit.
OIL:Persistent concerns over global growth have driven the international benchmark Brent oil to a 15-month low of $55 per barrel…falling 9.5% this week!
GOLD:Market turmoil and a weak dollar has driven gold to a six-month high at $1,260 per ounze.
One thing that seems guaranteed for 2019 is asset price volatility!
S&P 500: 2460
FTSE 100: 6750
Bonds – 10 Year Government Yields
EUR/USD 1.1400 (1 euro buys 1.1400 dollars)
GBP/USD 1.2600 (1 pound buys 1.2600 dollars)
OIL: Brent: 55.00 (dollars per barrel)
GOLD: 1260 (dollars per ounce)
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