An abrupt U-turn by the Federal Reserve on the prospect of further interest rate rises has helped put global stocks on track for their best month in almost three years.
Asian equities enjoyed the sharpest gains on Thursday, echoing a more than 1.5 per cent jump on Wall Street on Wednesday, after policymakers said they would be patient in assessing the outlook for monetary policy and that they were open to changing the speed at which the central bank’s multi-trillion dollar holdings of US government bonds was unwound. The S&P 500 rose 0.5 per cent in mid-morning US trade.
The shift in rhetoric was enough to convince investors that the Fed, which in December was projecting two further rate rises this year and has worked carefully to unwind the quantitative easing policies that injected trillions of dollars into the US economy after the financial crisis, is prepared to extend a decade-long stance of easy money.
“We’re actually quite encouraged by this new tone in Fed language, as we had been arguing for the advisability of a pause to rate hikes even before 2018’s dreadful fourth quarter for markets,” said Rick Rieder, head of fixed income at BlackRock.
The change from the Fed helped cement a strong rally for global equities in January, in a sharp reversal of December’s near meltdown in equities. The FTSE All World, a broad benchmark for world stocks, has climbed 7.2 per cent in January, and is closing in on its best month since March 2016. After tumbling almost 10 per cent in December, the S&P 500 has surged 7 per cent in its best month since October 2015.
The Fed cited slower growth in major markets, including China, and heightened geopolitical uncertainty, including trade tensions and Brexit, for its dramatic shift, which came as a relief to those — including President Donald Trump — who had been griping that Mr Powell had been too bullish about the outlook.
Michael Feroli, US economist at JPMorgan Chase, said he could not remember such a big change of direction by the Fed without a major shift in the economic backdrop. Harm Bandholz, chief US economist for UniCredit, said changes to the Fed’s statement on monetary policy gave traders and investors everything they could have hoped for.
Jumps on stock markets in Asia stood out on Thursday, with Japan’s Topix and Hong Kong’s Hang Seng index both rising about 1 per cent. Mainland China’s CSI 300 also shot up by over 1 per cent. The momentum ebbed in Europe, with Frankfurt’s Xetra Dax 30 falling 0.6 per cent in afternoon trade, having been up by the same margin in the morning. The region-wide Stoxx 600 slipped 0.25 per cent.
The prospect of an earlier end to the Fed’s monetary tightening sparked a more sustained rally in sovereign bonds, with the yield on two-year Treasuries falling under 2.5 per cent for the first time in three weeks. The yield on the 10-year Treasury fell 5 basis points to 2.65 per cent.
Meanwhile, the dollar weakened across the board, with the renminbi touching a six-month high. The onshore renminbi rose 0.2 per cent, enough for it to notch up its strongest calendar month in a year, up 2.5 per cent against the US dollar over January.
Tai Hui, chief market strategist for Asia Pacific at JPMorgan Asset Management, said the statement by the Fed to keep rates on hold “cleared one of two hurdles for Asian and emerging market risk assets to move higher”.
The remaining hurdle is the trade tension between China and the US, which he described as “much more challenging”. The Fed’s announcement should also ease concerns about rising funding costs for emerging market companies that have borrowed in US dollars, he added.
The focus is now firmly on the trade talks between the US and China. Donald Trump is set to meet Liu He, China’s vice-premier, at the end of high-level negotiations this week, to raise pressure on Beijing to make concessions on economic reforms, which could bring an end to the tariff war.
Analysts at ING said US negotiators were increasingly insisting on fundamental changes to China’s industrial policy “Made in China 2025”, as well as more transparent foreign exchange operations and the value of the renminbi.
Mr Trump earlier this year took to Twitter to criticise “China, the EU and others [for] manipulating their currencies and interest rates lower”.
