Global stocks are heading for their biggest drop in two weeks and emerging market currencies have also slipped as a confident US central bank and weak Chinese data hit demand for risky assets.
MSCI’s gauge of stocks across the globe fell half a per cent, its biggest drop since October 26, as the US Federal Reserve held interest rates as expected but indicated that another rate increase is likely in December.
While the decision to hold rates was anticipated by markets, some participants had expected a more cautious approach from the central bank after a stock market rout in October.
But the Fed indicated a December increase is a distinct possibility in a robust economy. That contrasts sharply with China, where cooling producer price inflation and falling car sales suggested an economy struggling to gain traction.
“Worries about trade wars and how the slowdown in China will impact the rest of the world mean stocks appear to be more risky, so there’s a typical risk-off move in markets today,” said DZ Bank rates strategist Pascal Segesser.
Stocks in Hong Kong and China were the main losers in Asia, where a financial sector sub-index fell more than 2 per cent after China’s banking watchdog told lenders to allocate at least a third of new loans to private companies, raising the prospects of a jump in bad assets.
European stocks followed Asia lower, with main indexes opening in the red, though a batch of company earnings and UK GDP data might offer some support later in the session.
MSCI’s main European index was down nearly 1 per cent and the broader Euro STOXX 600 fell 0.7 per cent.
A confident Fed also gave a boost to the dollar, which had weakened sharply after mid-term elections this week raised the prospects of US political gridlock. The greenback gained a quarter of a per cent against the euro and half a per cent against the British pound.
The dollar index measuring the currency against its six major rivals gained 0.25 per cent to 96.86.
Losses in equities pressured bond yields lower, with safe-haven benchmark debt in Germany and the United States softening across the board, pressured by world trade frictions and a budget stand-off between Italy and Brussels.
Oil prices fell to multi-month lows as global supply increased and investors worried about the impact on fuel demand from of lower economic growth and trade disputes.
Benchmark Brent crude oil fell to its lowest since early April, down more than 18 per cent since reaching four-year highs at the beginning of October.
The sturdy dollar tarnished the appetite for safe-haven gold , with the price down 0.2 per cent at $US1221.42 an ounce.
Still, market watchers said appetite for equities is likely to remain firm unless there is a big sell-off in credit markets or a spike in volatility.
An ETF tracking the performance of high-yield debt consolidated near three-week highs while gauges of volatility edged lower after a spike earlier this week.
“As long as these two indicators are not flashing red, stock markets should remain supported,” said Marc Ostwald, a global strategist at ADM Investor Services in London.
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© RAW 2018