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Markets unsettled by Federal Reserve decision Markets unsettled by Federal Reserve decision
(about 1 hour later)
European stock markets fell sharply on Friday after the US Federal Reserve backed away from raising interest rates, and blamed the weaker global economic outlook.European stock markets fell sharply on Friday after the US Federal Reserve backed away from raising interest rates, and blamed the weaker global economic outlook.
Related: Stock markets rattled after Fed puts rate hike on hold - live updates
The German and French indices both shed 2.5% by midday, while the FTSE 100 had lost 70 points, or over 1%. Investors were disconcerted by unexpectedly dovish comments by Federal Reserve chair Janet Yellen on Thursday night.The German and French indices both shed 2.5% by midday, while the FTSE 100 had lost 70 points, or over 1%. Investors were disconcerted by unexpectedly dovish comments by Federal Reserve chair Janet Yellen on Thursday night.
The selloff came after the euro strengthened one cent against the US dollar to $1.143, a move that would hurt eurozone manufacturers.The selloff came after the euro strengthened one cent against the US dollar to $1.143, a move that would hurt eurozone manufacturers.
“The longer investors had to ruminate on Thursday’s Fed statement the worse they seemed to take it, with the European indices widening their losses as the day went on,” said Conner Campbell of SpreadEX.“The longer investors had to ruminate on Thursday’s Fed statement the worse they seemed to take it, with the European indices widening their losses as the day went on,” said Conner Campbell of SpreadEX.
“An export-hurting rise in the euro-dollar was the main culprit.”“An export-hurting rise in the euro-dollar was the main culprit.”
The selloff came after Federal Open Market Committee voted to leave borrowing costs at their current record low of zero to 0.25%. At a later press conference, Yellen cited the slowing Chinese economy as a reason for caution. The selloff came after the Federal Open Market Committee voted to leave borrowing costs at their current record low of zero to 0.25%. At a later press conference, Yellen cited the slowing Chinese economy as a reason for caution.
“The outlook abroad appears to have become less certain,” Yellen said. “In the light of the heightened uncertainty abroad ... the committee judged it appropriate to wait.”“The outlook abroad appears to have become less certain,” Yellen said. “In the light of the heightened uncertainty abroad ... the committee judged it appropriate to wait.”
That helped to drove the US dollar down by 0.2% against major currencies. That helped to drive the US dollar down by 0.2% against major currencies.
In Japan, the Nikkei index fell 2% as the yen strengthened against the dollar.In Japan, the Nikkei index fell 2% as the yen strengthened against the dollar.
Money also flowed into German government debt, a classic safe haven, driving down the yield on bunds.Money also flowed into German government debt, a classic safe haven, driving down the yield on bunds.
Big moves in European #bond yields following US...German debt rallying, yield dropping 9bps on 10yer pic.twitter.com/St3WcgBPjJBig moves in European #bond yields following US...German debt rallying, yield dropping 9bps on 10yer pic.twitter.com/St3WcgBPjJ
Some economists had predicted that Thursday’s FOMC meeting would deliver the first rate hike in almost a decade, given recent improvements in the US labour market.Some economists had predicted that Thursday’s FOMC meeting would deliver the first rate hike in almost a decade, given recent improvements in the US labour market.
But after Yellen’s unexpectedly dovish performance, the Fed is unlikely to raise rates at its next meeting in October.But after Yellen’s unexpectedly dovish performance, the Fed is unlikely to raise rates at its next meeting in October.
And there’s now roughly 50% chance that the first hike comes in 2016, according to M&G’s Bond Vigilantes. And there’s now roughly a 50% chance that the first hike comes in 2016, according to M&G’s Bond Vigilantes.
Implied probabilities of a Fed rate hike following yesterday’s meeting pic.twitter.com/dNsqvdk1dNImplied probabilities of a Fed rate hike following yesterday’s meeting pic.twitter.com/dNsqvdk1dN
Risk aversion pushed the gold price up, meaning shares in gold producers bucked the trend on Friday.Risk aversion pushed the gold price up, meaning shares in gold producers bucked the trend on Friday.
Related: FTSE falters after Fed but gold shines as dollar fallsRelated: FTSE falters after Fed but gold shines as dollar falls
Market reaction to the Fed’s decision was split. Marc Ostwald of ADM Investor Services said Yellen has injected “ injecting further unwanted uncertainty” into the markets. Market reaction to the Fed’s decision was split. Marc Ostwald, of ADM Investor Services, accused Yellen of “ injecting further unwanted uncertainty” into the markets.
If the FOMC’s objective was to convey confusion, it has succeeded, thereby ploughing a deep furrow of instability and destabilization, and shining a very bright light on the large debt and liquidity trap it and other G7 central banks have spent 7 years crafting. If the FOMC’s objective was to convey confusion, it has succeeded, thereby ploughing a deep furrow of instability and destabilisation, and shining a very bright light on the large debt and liquidity trap it and other G7 central banks have spent seven years crafting.
But Anne Richards, chief investment officer at Aberdeen Asset Management, believes the Fed made the right call.But Anne Richards, chief investment officer at Aberdeen Asset Management, believes the Fed made the right call.
“Right now there is not a compelling reason to raise interest rates in the US, she told Bloomberg TV. “Right now, there is not a compelling reason to raise interest rates in the US,” she told Bloomberg TV.
There is a risk that by hiking too soon, the Fed “could make 2016 much uglier from an economic perspective”, Richards added.There is a risk that by hiking too soon, the Fed “could make 2016 much uglier from an economic perspective”, Richards added.