Markets risk off but Fed’s rate outlook triggers yield hunt

HONG KONG: Financial markets were rattled by the US Federal Reserve’s dire economic outlook and concerns about a second wave of coronavirus infections also weighed on sentiment.

In its post-meeting statement, the US central bank said the coronavirus pandemic “will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

The Fed projected that US GDP would shrink by 6.5% in 2020 before recovering to 5% in 2021. It lowered its 2020 projection but upgraded its forecast for 2021. The Fed also indicated there was a need to maintain zero interest rates right through to 2022.

“The Fed’s commitment should keep real interest rates (the price of money) very depressed, but because the economy is re-opening, this very easy monetary slant is becoming clearly positive for growth and inflation,” macro research firm BCA Research said in a note.

“While these forces are not enough to prevent a short-term pullback in equities, they increase the chances that any correction will not morph into a bear market and that global stocks will be significantly higher one year from now.”

Japan’s Nikkei index plummeted 2.82%, Australia’s S&P/ASX benchmark dived 3.05% lower and Hong Kong’s Hang Seng index tumbled 2.27%. US Treasuries rallied with the 10-year yield dropping 3 bps to 0.70%.

Awaiting further support

Investors are now awaiting further support from regulators in the world’s largest economy after Fed Chairman Jerome Powell said at the press conference the pandemic “weighs heavily” on the American economy and that the US central bank would do “whatever we can, and for as long as it takes” to support the recovery and “limit lasting damage” to the economy.

“Against this backdrop, further stimulus can be expected from the Fed – and also perhaps from Congress too – in the near future as the economic revival will be a longer process than many had hoped,” financial advisory firm deVere Group’s CEO Nigel Green said.

“This ‘backstop’ from the Fed slashes the threat of a second market slump even if economic data comes in worse than next quarter. It provides something of a ‘floor’ for equities.”

Credit markets are also defensive with the Asia IG index widening by 4 bps to 89/90. Sovereign CDS moved out by 2-7 bps.

Stock of the day

Shandong Gold Mining rose as much as 5.4%, outperforming the market as investors piled into the company, which is engaged in the mining, processing and sales of gold, following the US Reserve’s dire economic forecast. Gold prices rose after the central bank’s economic assessment and its indication that interest rates will not rise until 2022.

This story appeared first on Asia Times Financial.

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