- Markets unravel after Fed remains on hold
- FTSE 100 ‘fat finger’
- Higher euro crashes European stocks
- Gold, high-beta currencies surge
- US Dollar dumped on uncertain rate outlook
UK & Europe
UK and European shares slumped on Friday, mirroring a negative reaction from US stock market investors to the decision by the Federal Reserve to leave interest rates on hold.
Added to the woes on the FTSE 100, the index suddenly dropped nearly 2% with shares BP (LONDON:BP), BT (LONDON:BT) and HSBC (LONDON:HSBA) amongst others falling on what has been blamed on a trading error (or ‘fat finger’).
The fall in the dollar following the Fed’s decision caused a spike in the euro. Since the lower exchange rate has been the major catalyst for the out-performance of Europe’s export-orientated markets, yesterday’s jump in the euro has caused a heavy sell-off in European stocks.
Germany’s DAX had one of its worst days since ‘Black Monday’ while the French CAC was down as much as 3%. The FTSE 100 fell back beneath 6100, losing over 1.5%.
The UK economy is heavily reliant on exports but the strong pound has been a weight around the neck of exporters for a while. The FTSE has fared better than those on the continent after the Fed announcement because the jump in the pound doesn’t hurt UK stocks as badly as the surge in the euro hurts those in Europe.
Having rallied leading into the FOMC meeting in expectation of the beginning of a rising rate environment, which is supportive of margins on lending, banks were top fallers across Europe. In the UK, Barclays (LONDON:BARC), RBS (LONDON:RBS) and HSBC were all down around 3%.
The Federal Reserve’s fear over a global growth slowdown cast a shadow across the whole of the FTSE 100. The UK’s benchmark index has large number of multinationals exposed to the global economy.
Mining and oil & gas shares sold off heavily since the Fed highlighted the market volatility and growth slowdown in emerging markets, the region that consumes most of the world’s commodities. The only significant beneficiaries were gold miners Randgold (LONDON:RRS) and Fresnillo (LONDON:FRES) which rose nearly 4% after a drop in the US dollar spurred a jump in the price of gold.
US
US stocks opened sharply lower on Friday in a follow-through from Thursday’s swift reversal of gains that saw stocks end lower.
The Dow Jones Industrial Average dropped 200 point with all 30 listed stocks in the red.
FX
The dollar was mostly lower on Friday, seeing some of the most pronounced losses against the high-beta commodity currencies like the Australian and Canadian dollar.
The median rates forecast of Fed committee members for 2016/17 is now 25bp lower than noted in the previous “dot plot” which would imply a slower pace of rate rises on top of a delayed start. Not only was there no rate hike but the rate forecasts were more dovish as well so that undoes a lot of the bullishness priced into the currency. This may turn out to be more than just a small jolt to the dollar.
The surge in the Canadian dollar went counter to the sell-off in the price of oil but was supported by Canadian consumer price inflation data that met expectations. USD/CAD dropped to almost a one month low, just shy of 1.30.
The British pound continued to win favour after the strong UK employment data released this week while the euro gave back some of Thursday’s post-Fed gains.
Commodities
As mentioned yesterday, “commodities could be stuck between an emerging markets rock and a hard place.”
The fall in the dollar after the Fed kept rates on hold could have been a trigger for commodity strength but the reason the Fed kept on hold was because of concerns about “global economic and financial developments” (i.e. China). By not hiking rates, the Fed has confirmed the fears in the market place that China is about to go through a sustained period of contraction and commodity demand is likely to suffer the same fate.
Oil, copper and other base metals, the commodities most dependent on Chinese growth sold off heavily while gold and silver caught a safe-haven bid.
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