PRECIOUS-Gold holds losses from biggest dip in 5 months after Fed rate hike

23 Dec 2015 | Author: | No comments yet »

Equities drop on energy weight; dollar climbs.

U.S. stocks led a decline in most equity markets around the globe on Thursday, a day after the Federal Reserve’s first interest rate hike in nearly a decade, as continued pressure on oil weighed on the energy sector. Shares of Red Hat Inc. gained in Thursday’s extended session after the open-source software provider posted results that beat analysts’ expectations. The long-expected but modest increase in the federal funds rate also boosted the dollar to a fresh two-week high against a basket of major currencies, while Wall Street snapped a three-day rally.

Red Hat reported fiscal third-quarter earnings edged down to $46.9 million, or 25 cents a share, from $47.9 million, or 26 cents a share, a year earlier. Australia’s S&P/ASX 200 is down 1.4 per cent within the first half-hour of trade, while futures tip Japan’s Nikkei to climb 0.2 per cent and for Hong Kong’s Hang Seng to slide 0.1 per cent.

The stock markets cheered the Fed rate hike, but some economists saw the central bank as acknowledging how little it knows about where the economy might be headed. Brent and U.S. crude oil prices fell and remained near multi-year lows after fresh supply builds at the delivery point for U.S. crude futures added to worries about a global glut and strength in the dollar. The Fed statement hedged the possibility that inflation might not pick up much and acknowledged that global pressures could influence its choices going forward, said Charles Calomiris, a professor of economics and finance at Columbia University. Future decisions, the FOMC said, will be dependent on “a wide range of information.” That by itself is not informative, but a reading of the entire news release suggests that continued improvements in labor-market conditions will be critical to future rate decisions.

Red Hat projected earnings per share of 26 cents and 47 cents after adjustments in the fourth quarter while revenue is expected in a range of $535 million to $539 million. The global headwinds stemming from difficulties in emerging economies such as China, Russia and Brazil could further suppress inflation and hurt hiring, possibilities that the Fed might struggle to model. “The Fed is much more uncertain itself about what is going on in the economy and willing to express that,” Calomiris said. “It doesn’t have a very clear model of how the economy is functioning.” Bank of America says it is increasing the prime lending rate to 3.5 percent effective immediately, while Citibank, M&T Bank and PNC Financial plan to make the change effective Thursday.

The oil woes helped push U.S. equities lower after rallying on Wednesday, with the S&P energy index .SPNY down 2.5 percent as the worst performing of the 10 major S&P sectors. “I think what we’re going to see through the end of the year is a refocus on oil and commodities,” said Karen Hiatt, senior portfolio manager at Allianz Global Investors in San Francisco. Lower oil prices again weighed upon Wall Street, with Brent crude, the international benchmark, settling 0.9 per cent weaker at $37.06 a barrel after trading as low as $36.81 and reapproaching Monday’s seven-year low of $36.33. The Dow Jones industrial average .DJI fell 252.98 points, or 1.43 percent, to 17,496.11, the S&P 500 .SPX lost 31.16 points, or 1.5 percent, to 2,041.91 and the Nasdaq Composite .IXIC dropped 68.58 points, or 1.35 percent, to 5,002.55. MSCI’s all-country world index .MIWD00000PUS lost 0.7 percent, even as the pan-European FTSEurofirst 300 .FTEU3 index jumped 1.3 percent to close at 1,434.48. Economists at Goldman Sachs, in a note, said the Fed’s policy changes held very few surprises for Wall Street, and that’s partially why a blockbuster rally is unexpected in the days following the announcement. “The market reaction was limited, suggesting the policy and statement together were reasonably close to investor expectations.

Post-meeting rates in the overnight indexed swap market suggest investors expect the effective funds rate to settle at around 0.34% after liftoff, up from 0.15% in recent days,” the note said. That analysis derives from the Fed’s continued belief in the Phillips curve, the theory that there is an inverse relationship between the unemployment rate and the inflation rate. However, yields on the benchmark 10-year Treasury notes US10YT=RR fell to 2.2322 percent, up 16/32 in price as investors turned their attention to timing of the next hike. On Thursday, the Philadelphia Federal Reserve’s gauge of manufacturing activity for the mid-Atlantic region dropped solidly back into contraction territory as it tumbled to -5.9 from 1.9 the month prior. Meanwhile, the number of Americans filing for first-time unemployment benefits fell more than expected last week to 271,000 from an unrevised 282,000 the week prior.

Expectations were for 275,000. “In light of the firming of job growth since the October meeting, the [policy] statement significantly upgraded its assessment of labor market developments. It now notes ‘ongoing job gains’ and ‘declining unemployment,’ and says that underutilization of labor resources has diminished ‘appreciably,’” Goldman’s note continued. If employment measures continue to improve and economic activity continues, in the words of the FOMC’s news release, to expand “at a moderate rate,” then there will be more such 0.25% moves.

One risk to that scenario is mentioned in the release: “net exports have been soft.” The mere anticipation of the rate increase, plus weakness in other major economies, has already driven the dollar up on world currency markets. But be forewarned: Fed forecasts about economic growth have been notoriously inaccurate during the more than six-year recovery from the Great Recession. This is a crucial sign that the rising inflation Fed officials expect to see might remain elusive, as cheaper oil undercuts the economy’s ability to achieve the Fed’s 2 percent target. The increases came despite the news that U.S. industrial output fell for the third straight month in November, another sign that American manufacturers are under stress. The Fed’s Board of Governors will raise the interest rate paid on reserves to 0.5% and the FOMC will offer a rate of 0.25% on reverse repurchase agreements.

Though some in the markets question the ability of the U.S. economy to withstand higher U.S. interest rates, there is relief that the uncertainty over the Fed’s intentions is coming to an end. “Whether this optimism turns into a full blown Santa rally or not will depend on the Fed’s ability to manage expectations and reassure investors than the tightening cycle will be very gradual,” said Craig Erlam, senior market analyst at OANDA in London. Most Asian stock markets are finishing with big gains as anticipation builds for the Fed’s decision on whether to raise rates after seven years at ultralow levels. Hong Kong’s Hang Seng rebounded from a nine-day losing streak to advance 2 percent but gains were less robust on the Shanghai Composite Index in mainland China, which closed 0.2 percent higher.

Tara Sinclair, a professor at George Washington University and chief economist at the jobs site Indeed, says hiring in both industries would likely be influenced by how quickly the Fed raises rates over the next year. Some experts say higher American interest rates could increase capital outflows from China, put downward pressure on the yuan and complicate Beijing’s efforts to avoid a sharp economic slowdown. Wright says “the potential for normalization of U.S. monetary policy should definitely be seen as a headwind for Chinese attempts to ease monetary conditions.” Low interest rates have been a boon for stock market investors for several years but Fed officials have telegraphed the likely decision far in advance.

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