Asia’s stock markets may have taken it in their stride but Europe’s have tanked Friday in response to the Federal Reserve’s decision not to raise interest rates at its Open Market Committee meeting Thursday.
Investors in Europe clearly don’t like the read-across for their own markets from Fed chair Janet Yellen’s statement, which played up the risks from weakening emerging markets and the associated financial market volatility. European stocks are heavily geared to global growth and the thought of strong U.S. demand has been one of their chief consolations as the growth numbers in China and elsewhere have turned south.
The Fed’s decision to push back the first rate hike in nearly a decade has a double-whammy effect: for one thing the economic pessimism implies less demand from the U.S. for European goods and services in general; secondly, many players in the foreign exchange market are now unwinding bets on higher rates, forcing the euro and the British pound higher against the dollar, making European exports more expensive.
By late morning in London, the euro was at $1.1431, just off a four-week high of $1.1460, while the pound was at $1.5644, also close to a four-week high.
By contrast, the German DAX index was down 2.4%, the French CAC 40 2.5% and the U.K.’s FTSE 100 down 1.1%.
All other things being equal, keeping rates lower for longer (as implicit in the Fed’s publication of where its board members think rates should be for the next couple of years) should support stock markets, but analysts in Europe have inclined to the “glass half-empty” view Friday morning, saying that the biggest takeaway is the helplessness of central banks to support growth in a world of high debt, worsening demographics and overcapacity in many key industries.
“If the FOMC’s objective was to convey confusion, it has succeeded, thereby plowing 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,” said Marc Ostwald, a strategist with ADM ISI Securities in London.
Deutsche Bank’s chief economist, David Folkerts-Landau, was just as scathing.
“It is unfortunate that the Fed let recent bouts of volatility in global markets and concerns about growth abroad – especially in emerging market economies and China – stay its hand,” he said. “Starting the policy normalisation process now would have been absolutely appropriate and frankly long overdue.”
All that negativity has led to a much more conventional response in the bond markets, which are faily whizzing along. The yields on benchmark 10-year bonds in Europe have fallen sharply, partly in expectation that the ECB will have to do more work to keep the euro cheap and the recovery going. Only last week, the Eurozone’s central bank revised down its growth forecasts, mainly due to the same global pressures as cited by the Fed. Since then, its top brass have been busy in the media saying that there is scope to expand its ‘quantitative easing’ policy if need be.