Markets are reeling after a 'bizarre' Fed surprise

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  • The Federal Reserve surprised markets by cutting its interest-rate forecast to zero hikes this year and just one in 2020.
  • The US-China trade war appears set to linger after President Trump said tariffs could stay in place for a “substantial period of time.”
  • Brexit uncertainty has reached fresh levels after Prime Minister Theresa May requested a three-month extension.

Traders were left scrambling after the Federal Reserve forecast zero interest-rate hikes this year and just one in 2020. Rising uncertainty over Brexit and new signs of a prolonged US-China trade war added to the market confusion.

Fed Chairman Jerome Powell said it could be “some time” before unemployment and inflation prompt a change in policy, according to Bloomberg. The central bank cut its growth forecast from 2.3% to 2.1% this year, after the US economy expanded 2.9% last year. It also said it would cease allowing $US50 billion of Treasuries and mortgage-backed securities to roll off its balance sheet each month from September.

Meanwhile, President Donald Trump has signalled the US-China trade war might not come to a swift conclusion. He said tariffs on Chinese goods could remain in place for a “substantial period of time,” as his administration seeks concrete evidence that China will hold up its end of the bargain.

Further Brexit chaos is on the menu in Europe.Prime Minister Theresa May has requested a three-month extension to the Brexit deadline – an option her EU counterparts previously ruled out unless she persuaded parliament to support her Brexit deal. She may have no choice but to accept a prolonged extension or depart without a deal.

The Fed’s decision to signal a single interest-rate hike in 2020 is “bizarre,” said Naeem Aslam, chief market analyst at TF Global Markets. “Investors should take the Fed’s decision with some pinch of salt” as “it would only take a couple of strong economic readings before we see the pressure building up again on the Fed.”

While the Fed “kept insisting the economy was fine,” its actions “paint a distinctly less rosy picture,” said Jasper Lawler, head of research at London Capital Group.

Still “spooked by market gyrations” in the fourth quarter of 2018, the Fed has “thrown in the towel,” said Neil Wilson, chief markets analyst at Markets.com.

“What will be concerning investors behind their trading desks is…a coordinated downbeat view that is being presented by central banks and senior officials across the globe this year,” said Jameel Ahmad, global head of currency strategy and market research at FXTM.

“The Fed has certainly now joined this party by issuing its own need for ‘patience’ and that global headwinds remain a threat that needs to be closely watched.”

Here’s the market roundup as of 9.15 a.m. (5.15 a.m. ET):

  • US futures are flat, with those underlying the Dow, S&P 500 and Nasdaq no more than 0.1% up or down.
  • European stocks are mixed with Germany’s Dax down 0.2%, the Euro Stoxx 50 flat, and the FTSE 100 up 0.5%.
  • Asian stocks broadly closed higher with the Shanghai Composite Index up 0.4%, the SZSE Component up 0.7%, and Japan’s Nikkei up 0.2%. Hong Kong’s Hang Seng was down 0.9%.

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