World stocks wilt with the euro rising on ECB winding down its stimulus programme
The US Fed raises rates as expected, and intimates two more hikes this year, but concerns about a US-China trade war cast a shadow
London — The euro rose to its highest in a month but world stocks wilted on Thursday, as the European Central Bank (ECB) prepared to pull the plug on its €2.55-trillion, three-year stimulus programme.
After the Federal Reserve raised US interest rates for the second time this year and hinted at two more, it was shaping up to be a double-whammy for risk assets that have gained during years of ultra-cheap borrowing conditions.
All sectors on the pan-European STOXX 600 index were in negative territory. Basic resources stocks led the decline with a 1.3 drop following weak data from big metals consumer China.
The dollar rose after the Fed’s move, then faded in Asia and was still falling as the euro pushed above $1.1820 before the ECB met. Eurozone government bond yields also edged up with German bunds offering 0.49%. US treasuries drifted back though to 2.96% after briefly topping 3% overnight.
"I think its pragmatic for the Fed to take these moves, because if you are not going to make them now, when are you going to take them," Kully Samra, European MD at $3-trillion US asset manager Charles Schwab, said. The ECB had probably been too slow to reduce stimulus, Samra said, though recent weaker data showed Europe still had underlying issues.
In Asia, surprisingly soft Chinese retail sales and investment data had also hit sentiment. China’s central bank left its interest rates on hold, rather than follow the Fed, as it often does.
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 1.0%. Shares in South Korea and Taiwan fell more than 1%. Japan’s Nikkei dropped 0.6%. In mainland China, the Shanghai composite index hit a 20-month closing low, shedding 0.4%.
Any changes to the ECB’s asset-purchase programme should appear in the ECB policy statement at 11.45am GMT. The bank’s president Mario Draghi then holds a news conference at 12.30pm GMT.
The biggest complication for the ECB might be the increasingly murky economic outlook. The continent faces a developing trade war with the US, a populist challenge from Italy’s new government and softening export demand.
Also keeping investors in check was concern about US threats to impose tariffs on $50bn of Chinese goods. US President Donald Trump will meet with his trade advisers later to decide whether to activate the tariffs, a senior administration official said on Wednesday.
The S&P 500 and Dow Jones had both lost 0.4% to 0.5%, and the Nasdaq Composite dropped 0.11%. Futures markets pointed to subdued restart later.
The dollar stood at ¥110.06 after falling from a three-week high of ¥110.85 following the Fed’s decision. The dollar index, which tracks it again six top currencies, also erased all this week’s gains.
The Australian dollar fell 0.35% to $0.7551 after China’s poor economic data, but the yuan showed little reaction, especially after the People’s Bank of China opted not to raise its rates.
"There is no urgency for China to maintain its favourable yield differential against the US as capital outflow and currency stability is no longer the key concern for China at the moment," said Tommy Xie, an economist at OCBC Bank. "With a US-China trade war looming, a slightly weaker yuan may be in China’s favour."
Some emerging-market currencies have been hit hard by worries that higher US interest rates could prompt investors to shift funds to the US. The dip in the dollar on Thursday brought welcome relief.
SA’s rand rebounded from a six-month low; the Turkish lira pulled out of a dive; and the Mexican peso recovered from a 16-month low.
Among commodities, China-sensitive industrial metals sagged but gold and other precious metals made ground.
Oil prices were little changed, underpinned by a bigger-than-expected decline in US crude inventories and surprise drawdowns in petrol and distillates, which indicated strong demand in the world’s top oil consumer.
Brent and US crude futures traded at $76.83 and $66.67 a barrel, respectively, to extend their recovery from eight-week lows touched last week.