Fed feeds recession fears, global markets trade near 2-year low

World stocks were close to a two-year low and Japan was forced to unilaterally intervene in FX markets for the first time since 1998 on Thursday, after the Federal Reserve’s aggressive U.S. rate hike signals had put markets on the run.

In Europe, where all the economic pain and volatility has been amplified this week by Russia’s threat to use nuclear weapons, major stocks markets tumbled by more than one per cent before finding some support.

It had been a rollercoaster from the off. Tokyo swooped in to support the yen not long after Europe opened. While the move seemed to have been coming for weeks — the yen has fallen 20 per cent this year almost half of that in the last six weeks — it still packed a punch.

Traders watched the Japanese currency surge to 142.39 from 145.81 to the dollar in the space of a few minutes and make it as far as 140 to the greenback before running out of gas.

With the dollar suddenly stalled, the euro lifted nearly 0.5 per cent off a 20-year low. Sterling, which is not far behind the yen having lost over eight per cent since August, was hoisted from a 1985 trough too as the Bank of England raised its rates by another 50 basis points.

“We have taken decisive action (in the exchange market),” Japan’s vice finance minister for international affairs Masato Kanda told reporters following the interventions.

The move had came just hours after the BOJ had maintained super-low interest rates, fighting the global tide of monetary tightening by the Fed and others trying to rein in inflation.

Asian stocks had swooned to a two-year low overnight after the Fed’s rate hike and GDP forecast cuts had triggered a brutal finish on Wall Street, although S&P futures pointed to a modest rebound later.

“Fed is delivering exactly what it said it would (with rate hikes) but the markets have pushed out the path of interest rates quite a lot,” Close Brothers Asset Management Chief Investment Officer Robert Alster said.

“All of a sudden we are entering a scenario where everything gets a lot more drawn out... It is a bit disconcerting in some respects but at least they have laid out the road map and we know the economy is second to monetary policy.

Wall Street was expected to tick up when it reopens but the benchmark S&P 500 is now less than four per cent away from its mid-June low, its weakest point of the year.

In the rates market, short-term yields remain on the rise and the peak for the benchmark Fed funds rate a moving target.

The median of Fed officials’ own outlook has US rates at 4.4 per cent by year’s end — 100 bps higher than their June projection — and even higher, at 4.6 per cent, by the end of 2023.

Futures have scrambled to catch up. The yield on two-year Treasuries hit a 15-year high of 4.13 per cent in Asia before dipping back to 4.10 per cent in Europe.

Ten-year yields are below that, at 3.54 per cent as traders price in the hikes’ damage to longer-run growth. In Europe, Germany’s rate sensitive two-year bond yield rose as far as to 1.897 per cent — its highest since May 2011.

“No one knows whether this process will lead to a recession or if so how significant that recession would be,” Fed Chair Jerome Powell told reporters after the rate hike announcement.

“The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer.”

FOLLOW THE FED

The Swiss National Bank also pulled up its rates by a chunky 0.75 percentage point — only the second increase in 15 years which also ended its 7-1/2 year spell in negative interest rates.

“The more hawkish the Fed gets, the more market volatility is likely to be elevated, and the risk of a recession ticks higher,” said Gautam Khanna, Head of US Multi Sector Fixed Income at Insight Investment. — Reuters