Global Shares struggle on Volatile Session

Global shares floundered in the volatile trade on Thursday with Asian markets giving up their earlier gains after the Federal Reserve raised interest rates and affirmed plans for more policy tightening through 2020.

global shares flounder

European shares are seen to open slightly weaker as financial spread-betters witness Germany’s DAX slipping 0.3 percent, while Britain’s FTSE and France’s CAC shedding 0.1 percent.

In Asia, MSCI’s broadest index of Asia-Pacific shares excluding Japan slipped 0.1 percent, flipping back from an 0.3 percent increase during the earlier part of the session. There were, on the other hand, pockets of resilience such as South Korea’s Kospi, which reached three-month highs, as it continued trade after a three-day public holiday.

Japan’s Nikkei shortly reached an eight-month high as automakers perk up after the United States said that it would not impose further tariffs on Japanese automotive products for now, though it finished down 1.0 percent.

Asia generally fared better than Wall Street, where the Dow Jones Industrial Average slipped 0.4 percent and the S&P 500 shed 0.33 percent. The NASDAQ Composite slipped 0.21 percent.

The 10-year US Treasuries yield dropped to 3.043 percent, from Tuesday’s four-month high of 3.113 percent  as market participants readied themselves for a more hawkish outlook.

The drop in the Treasury yields was good news for Asia as well as other emerging markets, which had been under pressure by concerns that higher US yields would compel investors to move funds out of emerging markets to the United States, on top of concerns over the US-China trade dispute.

The Fed bumped up its policy target by a quarter of a percentage point to 2.00 to 2.25 percent and hinted that it predicts another rate hike in December, three more next year, and just one in 2020.

While such forecast was little changed from June, the Fed’s projected hikes will put the benchmark overnight lending rate at 3.4 percent by 2020, around half a percentage point above the Fed’s estimated “neutral” rate of interest.

“The Fed seems to have grown more convinced of the need to keep raising rates beyond neutral levels. I cannot see reasons to slow down raising rates as long as the jobless rate keeps falling,” said Tomoaki Shishido, who is a fixed income strategist at Nomura Securities.

The Fed also dropped a reference in its statement to the word “accommodative” although Chairman Jerome Powell later said that the policy was still accommodative.

He also added that the Fed didn’t have any precise understanding of when policy would be neutral, indicating Powell himself may not be attaching major significance to the Fed’s median estimate of the neutral rate of 2.9 percent.

Meanwhile, some investors believe that there is limited need for the Fed to keep on raising rates as inflation is showing zero signs of picking up in spite of the continued economic growth and the jobless rate near a two-decade low.

“Three hikes next year is absurd,” stated Bob Baur, who is the chief global economist at Principal Global Investors in Des Moines, Iowa. “With an additional rate hike likely in 2018 and one in March next year, we will reach what many Fed governors feel is a neutral rate level. With the low odds of a spike in inflation, it makes sense that the Fed would pause after the March rate hike and allow the markets to adjust to its new policy,” he explained.

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