Wall Street blues as markets fear Fed can't risk rate rise
Financial markets around the world fell yesterday, oil traded lower and the value of the dollar dropped amid investor unease over the health of the global economy.
Wall Street fell sharply for the fourth straight day on opening as traders slashed odds that the US Federal Reserve would hike interest rates next month - the first rise in nine years - after the central bank continued to voice concerns about lagging inflation in the world's largest economy.
In the UK, the FTSE 100 fell for an eighth straight day and was around 10pc lower than its high in April, meaning it moved into correction territory. Gold rose as demand for safe havens intensified.
Minutes from July's meeting of the Federal Reserve, released on Wednesday, appeared to pour cold water on rising expectations that the US central bank would increase rates next month in a sign of confidence in the US recovery.
But while the minutes showed that Fed officials agreed that the world's largest economy was nearing a point where rates should move higher, some were worried lagging inflation and a weak global economy posed risks too big to commit to a lift-off.
Juliet Tennent of Goodbody Stockbrokers said the minutes were more dovish than expected. "The central message was that while conditions for a rate increase were 'approaching', they are not there yet," Ms Tennent said.
"The market has been expecting the minutes to point to September 17 as the lift off date for interest rate hikes.
"However, the less than definitive message from the FOMC, coupled with growing uncertainty about China, saw the market reduce expectations of a September hike."
Traders said the probability of a September increase is now around 40pc, down from about 50pc towards the end of July, a factor that is likely to weigh on the dollar in the near term.
Shares in Asia hit a two-year low, German stocks extended losses in what is shaping up to be their worst month in over three years, and British stocks hit their lowest since January.
John Moclair, head of retail treasury sales at Bank of Ireland, said the Fed wasn't explicit in ruling a September hike in or out. "Most expect downward pressure on inflation, effects of past USD appreciation to be temporary; and participants generally still expect inflation to rise to 2pc in medium term," he said.
But adding to global woes, pressure on emerging market currencies intensified as investors fretted over not only US growth, but Chinese also. Fears that growth in China, which carried the global economy following the financial crisis, is slowing over the long term are affecting riskier assets around the world. Indeed, the health of the Chinese economy has been centre stage in recent weeks amid repeated devaluations of the yuan, which rippled across international markets.
Commodities and emerging markets were among the hardest-hit by fear of a slowdown in Chinese demand. And those worries were exacerbated by Wednesday's Fed minutes.
Davy Stockbrokers, however, believe the Fed is still on track for a September rate rise. "While the decision to lift off could become more balanced if external volatility intensifies, labour market conditions have continued to improve in line with expectations and core inflation is now at 1.8pc," said analyst David McNamara.
"So the September 17th meeting still seems the most likely date if the FOMC wants to get ahead of the curve, particularly with no meeting due until the end of October."