The Fed feeds recession fears, Japan intervenes in support of the yen

  • The Fed surprises with aggressive hike projections
  • Japan intervenes in FX when the dollar / yen rises above 145
  • Central bank bonanza with the rise of the UK, Switzerland and Norway

LONDON, 22 Sept. (Reuters) – World stock exchanges were near a two-year low and Japan was forced to step in to support the yen for the first time since 1998 on Thursday after aggressive US Federal Reserve rate hike signals led markets run.

In Europe, where fears over Russia’s threat to use nuclear weapons to defend itself have increased in addition to economic pain and volatility, major stock markets (.FTSE), (.GDAXI), (.FCHI) have plummeted by more than 1% before found support (.STOXX).

Tokyo rushed to support the yen not long after European markets opened. Although the move appeared to be coming for weeks, the yen has fallen 20% this year, nearly half of which has come in the past six weeks, but it still scored a hit.

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The yen climbed to 142.39 from 145.81 per dollar within minutes and hit 140 before stopping. / FRX

It also helped the euro take off from a 20-year low and lifted the pound, which is not far behind the yen which has lost more than 8% since August, from a low in 1985 when the Bank of England raised its rates by another 50 basis points. read more / FRX

“We have taken decisive action (in the foreign exchange market),” Japan’s Deputy Finance Minister for International Affairs Masato Kanda told reporters. Read more

The move came just hours after the BOJ had kept interest rates very low, fighting the global tide of monetary tightening by the Fed and others trying to curb inflation.

Asian equities fainted overnight to a two-year low after Fed rate hikes and GDP forecast cuts triggered a brutal ending on Wall Street, though S&P futures indicated a modest rebound thereafter.

“The Fed is delivering exactly what it said it would do (with rate hikes), but the markets have shifted the interest rate path quite a bit,” said Robert Alster, Chief Investment Officer of Close Brothers Asset Management.

“Suddenly we enter a scenario where everything stretches a lot more … It’s a bit disconcerting in some respects, but at least they have mapped out the roadmap and the economy is second to monetary policy.

In the interest rate market, short-term yields remain higher and the peak of the benchmark Fed fund rate is a moving target.

The Fed officials’ median outlook has US rates at 4.4% by the end of the year – 100 basis points higher than their June projection – and even higher, at 4.6%, by the end of the year. 2023.

Futures have climbed to recover. The two-year Treasury yield reached a 15-year high of 4.13% in Asia before falling back to 4.10% in Europe.

Ten-year yields are lower, at 3.54%, as traders discount the damage of increases to long-term growth. In Europe, the yield on Germany’s rate-sensitive 2-year bonds rose to 1.897%, the highest since May 2011.

“Nobody knows if this process will lead to a recession or, if so, how significant that recession would be,” Fed Chairman Jerome Powell told reporters after the rate hike was announced.

“The chances of a soft landing are likely to decrease as the policy has to be more tight or restrictive for longer.”

Yen sees a historic decline

FOLLOW THE FED

The Swiss National Bank also raised rates by a whopping 0.75 percentage points, only the second increase in 15 years that ended its period of negative interest rates.

Previously, Swiss rates had been frozen at minus 0.75% for years as the SNB tried to tame the appreciation of the Swiss franc, but Thursday’s message was that more may be needed in the current inflationary environment.

“To provide adequate monetary conditions, the SNB is also willing to be active in the foreign exchange market if necessary,” he added, pushing the franc up more than 1%.

The global outlook is helping to push the dollar higher as US yields look attractive and investors think other economies look too fragile to support rates as high as those contemplated in the US

Japan and China are outliers, and their currencies are slipping particularly strong: the yen had fallen to the weaker side of 145 per dollar on Thursday before the Tokyo intervention after the Bank of Japan adhered to its ultra-monetary policy. easy. Read more

Yields in the Japanese government bond market also fell as speculators closed some bets on upcoming political changes.

Back in Europe, Norway and the UK raised rates by 50bps and traders also saw many more on the way.

Not that it’s very beneficial for the region’s currencies.

The pound hit a 37-year low of $ 1.1213 overnight due to growing concerns over Britain’s finances and the Swedish krona had hit an all-time low despite the country’s strongest rate hike in a generation earlier this week.

The rise in the dollar has also brought down emerging market currencies and punished cryptocurrencies and commodities.

Lira traders winced when Turkey, where inflation is now around 85%, defied economic orthodoxy and cut its interest rates by another 100 basis points.

Spot gold fell 0.3% near its two-year low at $ 1,668 an ounce. Bitcoin was just above $ 19,000 and Brent crude remained stable at $ 90.33 a barrel after slipping due to concerns over demand.

“The more aggressive the Fed becomes, the more likely it is that market volatility will be high and the risk of a recession increases,” said Gautam Khanna, Head of US Multi Sector Fixed Income at Insight Investment.

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Additional Reporting by Tom Westbrook in Sydney; Editing by Frank Jack Daniel and Alexander Smith

Our Standards: Thomson Reuters Trust Principles.

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