Global Markets: Stocks spooked, bonds rally on downbeat Fed

Asia saw a 10-day winning streak come to an abrupt finish and Europe’s main bourses all opened with a heavy thud.

London’s FTSE, Frankfurt’s DAX and Paris’s CAC40 were all down more than 2.5% in what for coronavirus-sensitive sectors such as carmakers and travel and tourism was a fourth straight day of drops.

MSCI’s 49-country index of world stocks slid 0.75% in its largest daily loss in five weeks, while E-Mini futures for the S&P 500 fell 1.5% to extend the previous session’s pullback on Wall Street.

In a reality check to the stock market’s recent euphoria, the Fed predicted the U.S. economy would shrink 6.5% in 2020 and unemployment would still be at 9.3% at year’s end.

Data had also shown core U.S. consumer prices fell for a third straight month in May, the longest stretch of declines on record.

As a result, Fed Chair Jerome Powell said he was “not even thinking about thinking about raising rates”. Instead, he emphasised recovery would be a long road and that policy would have to be proactive with rates near zero out to 2022.

“While Powell did not commit to any new action at this time, his focus on downside risk and uncertainty reinforces the message that they will take further action, probably by September,” JPMorgan economists said.

“Outcome or calendar-based guidance looks likely and Powell left the door open for moving to some form of interest rate caps.”

Powell confirmed the Fed was studying yield curve control, a form of easing already employed by Japan and Australia.

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