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Fed’s Gloomy Projections Give Markets A Nasty Reality Check

Published 11/06/2020, 09:14
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Much like the British weather, a sunny start to June has given way to gloomy skies for the markets, the last few days crushing the optimism that had driven indices higher and higher.

Coming hot on the heels of the OECD’s own projections, the Federal Reserve revealed its economic forecasts on Wednesday night – and they didn’t make for comfortable reading.

Though the central bank’s estimates of a 6.5% contraction in the US this year are better than the OECD’s -7.3% expectations, that failed to reassure investors even one bit.

Instead the focus was on the ‘long road’ to recovery the Fed highlighted, including keeping interest rates near zero until the end of 2022. Jerome Powell was especially insistent on this point, stating that the FOMC was not even ‘thinking about thinking about raising rates’.

For the past few weeks investors have sort of forgotten that we are in the midst of a pandemic, overegging their optimism thanks to a lockdown-easing measure here, and a better than forecast nonfarm jobs report there.

Well, the OECD and Fed appear to have shaken the markets out of their short-sightedness, forcibly reminding investors that it is going to be a long, tough journey back to growth.

Message received. The FTSE sank 2.5% as trading got underway in Europe, taking it back under 6170. The DAX, meanwhile, plunged close to 3%, sinking the wrong side of 12200, with the CAC down the same amount as it desperately tried to keep above 4900.

The Dow Jones is set to follow in Europe’s footsteps this afternoon, the futures currently pencilling in a near-600 point cliff-dive when trading gets underway stateside. That would push the Dow back to 26400, almost 1200 points off of Monday’s 15-week highs.

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