European shares wilted and there was a stampede into bonds on Thursday, after the U.S. Federal Reserve’s abandonment of all plans to raise rates this year left traders wondering what might be lurking in the shadows.
World markets’ reaction to a super-dovish Fed was not unlike the response to the European Central Bank’s equally easy stance earlier this month – the benefits of a reduced interest rate horizon came laced with doubts.
Banks suffered their usual worries about low borrowing rates to drag the pan-European STOXX 600 down 0.2 percent, though London’s FTSE edged up as its miners were lifted by higher copper and metals prices.
The real action was in the bond markets.
With investors rushing to price in the prospect of U.S. rate cuts later this year, benchmark Treasury yields dived to their lowest since early 2018 and those on German Bunds – Europe’s benchmark – to the lowest since October 2016.
Ten-year Bund were offering buyers virtually nothing again at just 0.048 percent interest. Alongside widespread ‘curve’ flattening – where shorter and longer-term borrowing costs converge – there were alarm bells ringing
Rabobank strategist Philip Marey said the worry is that, having cut rates to the bone and already tried full-scale money printing, many central banks are now low on traditionally ammunition to fight recessions.
“The Fed has the most leeway because it has raised rates nine times so it could cuts rates nine times,” Marey said. “But it will be much more difficult for other central banks which haven’t even started to hike yet”, he reiterated.
The Fed’s swerve had sent the dollar sliding as far as 110.47 yen, with its 0.6 percent loss overnight the biggest drop since the flash crash of early January.
The euro flew to a seven-week peak before things started to reverse in Europe. It was last trading at US$1.1410, a world away from its recent low of US$1.1177 while Brexit woes kept the pound down at US$1.3175.
That all left the dollar at 96.100 against a basket of currencies, having lost 0.5 percent overnight. It was also poised precariously on its 200-day moving average, and a sustained break would be taken as technically ‘bearish’.
“The downward pressure on U.S. yields continues to support our outlook for a weaker U.S. dollar this year,” said MUFG analysts in a note.