Equities and dollar slip as Fed rate path jitters build
london — World shares fell on Wednesday and the US dollar eased off three-week highs as market participants awaited a likely increase in US interest rates and guidance on how many more to expect for this year.
Markets are on edge, not only because of the US Federal Reserve meeting which should deliver the first rate rise of 2018, but also because of a selloff in US tech shares, which has wiped almost $50 billion off the value of Facebook this week amid uproar over the alleged misuse of users’ data.
The Facebook losses have filtered through other tech shares in the US and overseas, with shares in Twitter falling more than 10 per cent on Tuesday.
The losses are likely to have hit investors hard, with Bank of America Merrill Lynch’s monthly survey showing global funds heavily positioned in tech shares just before the rout began .
“There are tensions between potential bad news and good news in the market. The bad news is the problem facing the tech sector, which has been the leading light of US and Asian equity markets for over a year,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
“The good news is we must recall why the Fed is tightening policy. It’s because of the underlying strength of the US and global economy.” MSCI’s all-country equity index flatlined, and is now 6 per cent off record highs hit at the end of January, pressured by fears of a global trade war ignited by US President Donald Trump and the possibility that the Fed could end up raising interest rates more than three times this year. The Fed has increased borrowing costs five times since it began tightening policy in late 2015. Markets are pricing in three rises this year but some reckon policymakers could squeeze in a fourth, which might trigger a bond and equity selloff. The 1800 GMT announcement will also be the first under new Fed chair Jerome Powell, analysts note. “We might have significant changes in communication compared with what we’ve seen under (previous chair Janet) Yellen,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
“The economic situation post tax cuts also justifies a significant shift upwards in the dot plot,” he added, referring to fears the Fed’s de facto policy forecast chart could signal four rate rises rather than three, due to the economic boost delivered by Trump’s tax reforms.
Those expectations had sent the dollar to nearly three-week highs on Tuesday but it eased back a quarter per cent against a basket of currencies on Wednesday, having lost almost half a per cent this month.