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Market Reaction to Fed’s Historic Tightening
Stocks posted gains as investors responded to the potential peak of the Federal Reserve’s historic tightening campaign and digested the latest major company earnings. Europe’s Stoxx 600 index saw a rise, particularly in rates-sensitive real estate stocks, marking its best run since July. US equity futures also indicated an extension of Wednesday’s gains on Wall Street, and Asian stocks headed for their most substantial gain in nearly four months.
Positive Earnings Reports
Novo Nordisk A/S reported robust third-quarter sales, driven by the strong demand for its blockbuster obesity and diabetes drugs. Shell Plc accelerated its share buyback program following a rise in third-quarter profit. Apple Inc.’s earnings report is awaited later in the day.
Fed’s Cautious Approach
Although the Federal Reserve left the door open for another interest rate increase after a pause on Wednesday, officials hinted that the surge in long-term Treasury yields has reduced the urgency to further tighten monetary policy. Meanwhile, the Bank of England is expected to maintain interest rates at the highest level since 2008, reflecting signs of economic weakening in the UK.
Market Developments
The dollar weakened, and Treasuries stabilized following Wednesday’s significant gains. US yields were already on a downward trajectory before the Fed’s decision due to the government’s announcement of borrowing slightly less than anticipated over the next three months. Furthermore, a US factory activity gauge came in below expectations, raising concerns about a potential economic downturn.
Optimism in Asian Markets
In Asia, the yen extended its gains from Wednesday, and the South Korean won led emerging-market currencies higher. The rebound in Asian stocks signifies investor relief, as concerns about sustained higher US rates and ongoing rate hikes into 2024 have weighed on the region’s markets.
Fed’s Cautious Words
Fed Chair Jerome Powell acknowledged that financial conditions have “tightened significantly in recent months” due to factors such as higher long-term bond yields. While the committee is proceeding with caution, a term often indicating a low likelihood of an immediate policy change, Powell also noted that the risks to the outlook have become more balanced as the tightening campaign nears its conclusion.
Outlook and Caution
While some experts interpret these developments as a sign that the Fed’s tightening cycle may be coming to an end, others remain cautious. David Chao, Global Market Strategist at Invesco, anticipates a growing global risk appetite, but warns that market assumptions may soon start to discount an economic recovery in 2024.
Mixed US Jobs Data
US jobs data revealed a mixed picture, with more job openings than forecast in the JOLTS report, but ADP’s private payrolls figures showing fewer new roles than expected. Initial jobless claims figures are expected later on Thursday.
In conclusion, the markets are reacting to the Federal Reserve’s cautious approach to tightening and the latest earnings reports. The focus remains on the trajectory of interest rates and their impact on the global economic outlook.
