LDN - Business

Fed points upwards for rates, world stocks lurch downward

[February 22, 2018] By Sujata Rao

LONDON (Reuters) - World stocks tumbled to one-week lows on Thursday after the U.S. Federal Reserve confirmed it was on track to raise interest rates several times this year, sending bond yields to multi-year highs.

Wall Street was set for its third straight session in the red, equity futures indicated.

While U.S. 10-year yields retreated from the 3 percent big figure, minutes of the Fed's meeting at the end of January have at least temporarily taken the edge off investors' appetite for equities and other assets perceived as risky, such as emerging markets and commodities..

The minutes showed Fed policymakers agreed at the meeting, held after U.S. lawmakers had approved some $1.5 trillion in tax cuts, that "a gradual upward trajectory of the federal funds rate would be appropriate". They also noted "upward risks" to economic growth and inflation.

As a result, the odds of faster U.S. interest rate hikes have narrowed, with a host of Fed fund futures <0#FF:> hitting contract lows. While three rate rises are almost fully priced in for 2018 -- up from two in December -- some traders now reckon four moves might be possible this year.

Some of the impact of the minutes had started to fade however, with the dollar now trading off 10-day highs against a basket of currencies <.DXY> and U.S. Treasury yields edging off four-year highs around 2.96 percent <US10YT=RR>.

Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management in Geneva, said markets seemed to have finally accepted a faster rate rise trajectory for 2018.

But she saw no reason for an equity market collapse or sharp bond selloff.

"When I look at the fundamentals, I see stable growth in all major economies, good earnings from the majority of companies and in a historical context, I see low interest rates and low inflation," Owens Thomsen said.

She was referring to 75 percent of U.S. S&P 500-listed firms which have beaten analysts' forecasts with their fourth-quarter 2017 results, while in Europe the number stands at more than 53 percent, according to Thomson Reuters data.

Despite the solid earnings, Wall Street closed sharply lower on Wednesday and its losses drove falls of around 1 percent in Asia and Europe <.MIAPJ0000PUS> <.N225> <.STOXX>.

MSCI's all-country equity index <.MIWD00000PUS> stayed under pressure, losing 0.4 percent for its third straight day of losses, while emerging equities lost 1 percent <.MSCIEF>.

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A man walks past an electronic stock quotation board outside a brokerage in Tokyo, Japan, February 9, 2018. REUTERS/Toru Hanai

New York was set for another weak session, with S&P futures down around 0.3 percent <ESc1>.

DOVISH ECB

The impact of the Fed's minutes was further tempered by the latest minutes from the European Central Bank, which retained its dovish stance and said even changes in communication would be "premature".

The comments suggest that policymakers will move by increments, keeping one eye on markets to avoid having to backtrack.

German 10-year yields did not react to the ECB minutes, though they were well off the 0.75 percent hit after the Fed minutes, tempered by data showing German business confidence fell more than expected in February.

While Europe's biggest economy is clearly set for solid growth in the first quarter of 2018, the diverging monetary policy expectations with the United States sent the "transatlantic spread" between German and U.S. 10-year borrowing costs to 222 bps, the highest in more than a year.

The next milestone for markets is new Fed chairman Jerome Powell's first testimony to Congress, scheduled for Wednesday. What he says could determine whether 10-year Treasury yields can scale the 3 percent psychological hurdle.

Analysts at MUFG Securities said if Powell signaled the current tightening pace would remain, that would support global equity markets.

"The major risk now lies in the DOTS increasing from three rate hikes to four," they added, referring to the projected path for interest rate moves.

Britain, meanwhile confirmed itself as one of the weak spots in the world economy, with data showing below-forecast 0.4 percent growth in the last quarter of 2017.

That pushed sterling 0.2 percent lower against the dollar <GBP=>, a one-week low.

(Reporting by Sujata Rao; Additional reporting by Wayne Cole in Sydney; Editing by Catherine Evans)

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