Stocks are down after the Fed voiced concerns about the global economy in its FOMC statement this morning.
The Dow has lost 1.4%, more than 200 points, and the S&P 500 is down 1.2% and back at 1880. That’s hurt futures on the ASX in the past couple of hours with the SPI 200 futures contract moving from positive territory pre-Fed to sit down 28 points at 4,887 now.
Forex traders have also reacted strongly to the Fed’s message. The US dollar has fallen a little with the euro at 1.0891. But the negative slant of the message has knocked the Aussie dollar back off its highs and it is sitting at 0.7025 this morning.
No doubt some of that weakness is NZD induced as the Kiwi is down 0.9% and getting hammered after the RBNZ left rates on hold this morning.
On commodity markets, oil is up 1.46% but off its highs pre-Fed, copper is holding nicely at $2.05 a pound and gold continues to rally and is at $1,125 this morning.
Here’s the scoreboard (8.00am):
- Dow: 15,943, -220 (-1.35%)
- S&P 500: 1,880, -24 (-1.27%)
- SPI200 Futures (March): 4,887, -28 (-0.6%)
- AUDUSD: 0.7022, +0.0023 (+0.31%)
And the top stories:
1. The Fed has put markets on notice. Cue September 2015?
The Fed left rates on hold this morning but it’s clear in their statement that they are watching global markets and economic developments very closely. As it did at the September 2015 FOMC meeting, in naming its fears about the global economy the Fed has set the proverbial cat amongst the traders’ pigeons.
Also, in dropping the reference to the risks for economic growth being balanced, the message the Fed seems to be giving, and the market clearly heard, is that the outlook has darkened and the Fed is worried.
Elena Holodny has more here.
The NAB’s senior economist David deGaris reckons he might have a line on Fed thinking. He highlighted in the NAB’s morning note today that the Fed “dropped its expectation of being “reasonably confident that inflation will rise to 2% over the medium term to 2%, opting for further risk evaluation.” Some way to a change in the dot-plot expectation of 4 hikes this year maybe?
2. Fortescue is being punished because of its ties to China. At just $1.46 a share, Fortescue stock (FMG) is at its lowest level since 2008 when Fortescue founder Andrew Forrest fought hard to keep his company afloat.
But while iron ore has recovered over the past two months, the FMG share price is still languishing and investors have a negative outlook on FMG because of its strong China ties and low grade ore.
3. No matter what the Fed does, Ray Dalio is worried it won’t work anyway. Central bank policy efficacy is the single most important question facing global economies and markets right now. Each drop in interest rates by central banks, each money drop, each increase in quantitative easing, is aimed at stimulating spending today that was going to happen in the future.
So we have been borrowing from our future and at some point that stops working.
Dalio is worried that time has come. He’s also “worried that the one of the fixed constants of economics — the ability of central banks to stimulate economic growth through lowering the cost of debt — is coming to an end.”
4. Russia and the Saudis are holding talks about output cuts. Dalio might have put his finger on the big question but oil prices remain an important driver of markets in 2016. So news overnight that Russia is to hold talks with the Saudis and other OPEC members is a big story for traders.
The FT reports that Nikolai Tokarev, head of state pipeline monopoly Transneft, said “there was a discussion about the price of oil, what measures we should be taking today collectively to improve the situation, including both discussions with Opec as whole and bilateral options…Saudi Arabia made a proposal, it is planned to hold discussions, including with Opec members.”
Akin Oyedele reports that it might be a good time for a chat because the amount of crude oil sitting in storage is almost literally off the chart.
5. China’s growth rate might actually be as low as 4.2%, and they should let market volatility run. Two themes combine here nicely. David Scutt covered an interesting piece from the WSJ quoting Xu Dianqing, an economics professor at Beijing Normal University and the University of West Ontario, who is estimating that China’s gross domestic product growth rate might just be between 4.3% and 5.2%.
That’s a challenge for the central government in Beijing trying to restrain the collapse of the Shanghai stock market bubble and the capital flight from the nation. But Greg Ip, writing in the WSJ this morning, makes a cogent case that China should welcome the volatility because it is teaching valuable lesson to players in Chinese financial markets. He uses some nice analogies, including gridiron without helmets and the perils of an over-reliance on auto pilot, to make his case.
But authorities in Beijing remain unreconstructed. The WSJ reports they are sharpening efforts to halt the money outflow. Unless they lock the gate and ban capital flows, it’s likely they are just going to burn up reserves.
6. This guy once tipped to get Janet Yellen’s job wants to Fed to keep hiking and let markets fall. Martin Feldstein is a Harvard economist, president emeritus of the National Bureau of Economic Research, and the man once tipped to lead the Fed. Talking to MarketWatch, he said the Fed should keep raising rates so as to end the idea that the Fed will continue to backstop the markets with the “Fed Put” (a put is an option that helps reduce losses when the price of an asset falls).
Of course, while it okay for everyone to give China advice to let the markets run and clear, there is a little bit, okay a lot, of cognitive dissonance when it comes to Wall Street and the Fed. The article is worth a read to get his perspective.
And if the Fed follows his advice stocks are likely to come under severe pressure. But this chart says the S&P500 could fall to 1600 anyway.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The big 4 Australian banks, already very similar look like becoming even more so. Yesterday, NAB shareholders approved arrangements for the spin-off of its UK subsidiaries. On the same day, ANZ announced a new management structure. This has observers expecting that it’s preparing to quit those parts of its Asian retail banking business that it owns directly.
While the businesses are converging, market valuations are not. ANZ is trading at around 9.2 times forward earnings while CBA is valued at 14 times.
The ANZ price chart remains in a steep downtrend. The next potential features on the chart are Fibonacci retracements between around $21.50 and $21.70. These are the 78.6% retracement of the 2011-15 rally and 61.8% of the entire post GFC gains.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC