Analyst
Europe’s Stoxx 600 Index witnessed a hefty 0.7% decline with most industry groups experiencing sharp losses in response to the Fed "hawkish rate pause". Most analysts and investors had assumed that Fed Chairman Powell would be less decisive, which the markets would see as no significant change in the interest rate outlook - a mis judgement. All eyes turn now to the Bank of England's rate decision set for later today (11:00 UTC+0). The market is split whether the BoE will increase interest rates to 5.5% from 5.25% or not.
The GBP showcased weakness as markets await the Bank of England's policy decision. The unexpected slowdown in UK inflation led to reduced expectations for further BOE tightening. Some experts are suggesting that the BOE might hint at the end of the hiking cycle even if they decide on a rate increase - similar to the ECB in the previous week - which, however, caused confusion.
In the US, equity futures showed losses, adding to the previous Wall Street downturns. Mega-caps Apple, Amazon, Microsoft and Tesla fell by around 2%, Alphabet by as much as more than 3%, contributing significantly to the sharp declines in the US 500 and US 100 that caught many analysts and investors off guard.
The Federal Reserve held its target range steady. However, updated quarterly projections indicated that a majority of officials anticipate another rate hike in 2023. The median forecast for the federal funds rate by year-end is now 5.1%, up from the 4.6% projection in June. More importantly, the outlook for rate cuts has now been pushed even further into the future - only about one interest rate cut is planned for 2024.
US treasury yields experienced a slight increase, especially notable after the two-year yield recently achieved its highest mark since 2006. Meanwhile, the USD showcased strength against major currencies.
In Asia, stocks saw their largest drop in over a month. The JPY weakened, reaching its lowest against the USD since last November. Predictions suggest potential official support for the Japanese currency if it reaches 150 per USD due to concerns over increased inflationary pressure.
In commodities, oil's recent rally paused in response to a more hawkish rate outlook and as US crude stockpiles didn't drop as expected. With rising yields, gold's attractiveness compared to bonds diminishes, making it a less favorable investment option in the current scenario.
Key events today:
GBP BoE Interest Rate Decision - 11:00 UTC+0
USD Initial Jobless Claims - 12:30 UTC+0
EUR Consumer Confidence (flash) - 14:00 UTC+0
EUR ECB President Lagarde Speech - 14:00 UTC+0
GBP Gfk Consumer Confidence - 23:01 UTC+0
JPY Inflation Rate / CPI - 23:30 UTC+0
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