Today's Markets: Global stocks weaker post Fed, FTSE manages to eke out small gains on flurry of updates

European stock markets slumped in early trade on Thursday, taking the cue from a very soft Asian session, as markets digested the Federal Reserve’s statement last night. US stock markets reversed earlier gains in another seesaw day on Wall Street. The Dow Jones fell 130pts, having been up more than 500pts at one point, as Fed chair Jay Powell signaled the US central bank could be open to more rate hikes this year than it has previously guided. The S&P 500 was down 0.15 per cent and the Nasdaq managed to end flat, though almost 500pts from its intra-day high. 

The FTSE 100 scrubbed early losses, bouncing off 7,380 to around 7,485, slightly higher for the session. Losses across European bourses were steeper, 1 per cent for the DAX, CAC and Stoxx 50. It was a very weak handover from Asia: Japan’s Nikkei and Korea’s Kospi fell more than 3 per cent overnight, while Hong Kong was down over 2 per cent. 

Rates rose post-Fed, with sharp belly steepening taking the US 2yr rate above 1.2 per cent, the highest in two years, and 5s to 1.7 per cent, also the highest since early 2020. The yield on the 10yr note rose close to 1.87 per cent, near its recent high. Rising yields weighed on gold, which retreated to long-term trend support at $1,810, having traded above $1,850 earlier on Wednesday. The dollar was bid strongly on the news, sending DXY towards the November peak, the highest it’s traded since Jul 2020. Dollar remains on front foot this morning with GBPUSD sinking to a one-month low and EURUSD at 1.12, threatening the November low.

The Fed gave the green light to lifting rates in March but chose to keep on with asset purchases until them, rather than ending them sooner. Quantitative tightening – reducing the balance sheet – will come some time later. The hawkishness came from Jay Powell in the press conference. He stressed that the economy and labour market are in much better shape than in 2015, the last hiking cycle. 

Powell dropped some remarks that can only lead us to think the Fed is minded to raise rates more aggressively than the dots and markets had thought. "I think there’s quite a bit of room to raise interest rates without threatening the labour market,” he said. Powell didn’t rule out hiking every meeting, pointing to as many as seven 25bps hikes this year.  "You have seen that our communication channel with the markets is working; markets are now pricing in a number of rate increases,” he added. The risks are skewed to the Fed doing more than 4 hikes this year. The problem for the market is that there is still a lot of uncertainty: 4 vs 7/8 hikes is still the spread so there is a lot of space in that to get it wrong and for markets to misfire... which means volatility. The Fed will be hoping that inflation runs off in Q2, allowing it to say the hikes are working and ease back from doing much more, however if demand-led price growth sticks around it’s got a lot of catching up to do and 7 hikes could seem light. Market ructions over the last couple of weeks reflect this already. Do things settle down now until March? Hard to say: the market took Powell’s ‘wait-and-see’ optionality as hawkish, but that could be wrong. I feel the lack of clarity and consensus over what the Fed is going to do means more volatility for the time being.

Neil Wilson is the Chief Market Analyst at markets.com