Markets tumble as US Fed signals end of pandemic-era cheap cash
published : 27 Jan 2022 at 15:32
Equity markets tanked Thursday following a late sell-off on Wall Street in reaction to a surprisingly hawkish turn by US Federal Reserve boss Jerome Powell, who signalled the bank would begin lifting interest rates in March.
After one of the Fed's most highly anticipated meetings, he said the world's number one economy was well on the recovery path with unemployment largely under control, allowing officials to begin removing the crutches put in place at the start of the pandemic.
In a news conference, he told reporters "the committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so".
Although a March hike was pencilled in by traders for several months, investors were spooked by Powell's apparent hawkishness as he refused to be drawn on a timetable for further increases nor its plans to unload assets on its balance sheet, which have helped keep costs down.
Analysts said the fact that the bank appeared less moved by recent market losses indicated to traders a high bar for the so-called "Fed put" -- referring to its willingness to backstop investors in times of trouble.
The Fed's pandemic-era financial largesse of bond-buying stimulus and record-low interest rates helped the global recovery and fuel a two-year equity rally.
But the age of cheap cash is being brought to an end as the bank embarks on a fight to bring down inflation from a four-decade high.
Officials still believe the price rises will be brought under control as economies reopen and supply chain problems abate, but the need to prevent them from running away now is forcing them into an aggressive pivot.
The meeting "played out more hawkishly than we expected", said Steven Englander at Standard Chartered Bank.
"The (policy board) statement was largely as anticipated, but... Powell emphasised upside risks to inflation, pointing to a steady pace of policy withdrawal."
Powell's comments sent Wall Street sharply lower from their intra-day levels with tech firms, which are more susceptible to higher borrowing costs, taking the brunt.
- 'Behind the curve' -
And Asia followed the selling with tech again at the forefront of losses, while the dollar extended a rally against most other currencies.
Seoul tanked more than 3% into a bear market -- a 20% drop from its recent high hit in August, while Sydney fell into a correction, having given up 10% from its latest peak.
Tokyo also took a 3.1% pounding as market heavyweights Sony and SoftBank -- which invests heavily in the tech sector -- led losses, while Hong Kong was 2% off.
There were also painful losses in Shanghai, Singapore, Wellington, Mumbai, Bangkok and Jakarta, though forecast-beating economic data helped Manila post gains.
The benchmark Stock Exchange of Thailand index was down 0.95% at 3.37pm.
London, Paris and Frankfurt opened sharply lower, while US futures were well in the red.
"Investors appear to have become increasingly conscious of the risks that the Fed may end up cooling any economic growth with too much monetary tightening," Tomo Kinoshita, at Invesco Asset Management, said.
Commentators were left guessing how much the Fed will lift rates in March and how many more times it will do so, with estimates ranging from a total of three this year to as many as five.
But there was concern about Powell's refusal to reassure that the increases would be tempered.
"At least in today's case, Powell's desire for flexibility was viewed as hawkish, given his comments regarding inflation," Sameer Samana, of Wells Fargo Investment Institute, said.
"It sounds like he is acknowledging the Fed is behind the curve and can't commit to a path that won't upset financial markets."
Oil prices slipped, having enjoyed a strong rally Wednesday that saw Brent break $90 for the first time in seven years owing to rising Ukraine-Russia tensions and data showing another steep drop in US stockpiles as demand improves.
Eyes are also on the upcoming meeting of OPEC and other key producers, where they will discuss plans to continue to increase output.
"Energy traders are anticipating higher energy prices on potential geopolitical risks and as OPEC+ will stick to their plan to deliver another modest increase to production at next week's meeting," said OANDA's Edward Moya.
- Key figures around 3.15pm -
Tokyo - Nikkei 225: DOWN 3.1% at 26,170.30 (close)
Hong Kong - Hang Seng Index: DOWN 2.0% at 23,807.00 (close)
Shanghai - Composite: DOWN 1.8% at 3,394.25 (close)
London - FTSE 100: DOWN 1.0% at 7395.00
Dollar/yen: UP at 114.73 yen from 114.64 yen late Wednesday
Euro/dollar: DOWN at $1.1195 from $1.1238
Pound/dollar: DOWN at $1.3408 from $1.3458
Euro/pound: UP at 83.50 pence from 83.45 pence
West Texas Intermediate: DOWN 0.3% at $87.10 per barrel
Brent North Sea crude: DOWN 0.3% at $89.73 per barrel
New York - Dow: DOWN 0.4% at 34,168.09 (close)