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Global stocks and emerging market currencies sank on Thursday after the US Federal Reserve indicated it would cut interest rates more slowly next year to guard against any renewed threat of inflation.
The quarter-point reduction in interest rates the Fed delivered on Wednesday, at its final meeting before president-elect Donald Trump takes office next month, was overshadowed as officials trimmed projected cuts in 2025.
Signs the Fed remains concerned over lingering inflation — and the threat that Trump’s economic plans could add to price pressures — sent the dollar index, a gauge of the US currency against six peers, up to its highest level since November 2022, although it later gave up some ground.
European and Asian stocks fell following a steep sell-off on Wall Street on Wednesday, as investors were jolted by the prospect the Fed would lower borrowing costs less rapidly.
Europe’s benchmark Stoxx 600 and the FTSE 100 both fell 1.2 per cent.
“The narrative has shifted from inflation in abeyance and downside growth risks, to the Fed acknowledging the economy is in a ‘really good place’ and seriously questioning how much further rates need to be cut after all,” said Chris Turner, global head of markets at ING.
Concerns about inflation stalling above 2 per cent contributed to Fed officials forecasting just half a percentage point worth of cuts in 2025, down from the full percentage in their last projections in September.
In volatile trading late on Wednesday, the S&P 500 index closed down 2.9 per cent and the tech-heavy Nasdaq Composite fell 3.6 per cent. Many of the biggest winners in a powerful 2024 equities rally pulled back.
In bond markets, the yield on the benchmark 10-year Treasury rose another 0.04 percentage points to 4.54 per cent. The rate-sensitive two-year yield dipped 0.03 percentage points to 4.33 per cent after rising 0.11 percentage points.
Indications that US interest rates could remain higher for longer, sharpening the appeal of the dollar, hit Asian markets hard on Thursday.
“Markets were surprised by the perceived hawkishness of the Fed,” said Mitul Kotecha, head of emerging market macro strategy at Barclays in Singapore.
The Indian rupee fell to a record low of Rs85.1 against the dollar. The Chinese renminbi and Japanese yen dropped sharply, with South Korea’s won sinking to a 15-year low.
Across equity markets, Australia’s S&P/ASX 200 was down 1.7 per cent, South Korea’s Kospi fell 2 per cent and India’s Sensex weakened 1.2 per cent.
Meanwhile, Japan’s currency-sensitive Nikkei 225 index was down 0.7 per cent after the Bank of Japan opted to hold rates steady on Thursday.
“For Asia, which has struggled in terms of relatively lower yields and the weakness in China adding pressure on the region, [today’s falls] are the culmination of those factors,” said Scarlett Liu, a strategist at BNP Paribas.
Bitcoin, which tumbled more than 5 per cent yesterday, recovered 0.8 per cent to $100,930 per token on Thursday.
“Given the risk of resurging inflation from potential trade tariffs and a slowdown in immigration that has been cooling pressure in the labour market, market expectations of only two more cuts in 2025 now seem reasonable”, wrote Jean Boivin, head of the BlackRock Investment Institute, in a note.
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