Market snapshot: US policymakers wrongfoot the market

Investors were blindsided as the Federal Reserve halved the expected pace of interest rate cuts for next year, with each of the main indices tumbling as a result.

In line with expectations, the Fed obliged with a 0.25% cut, the third reduction this year. However, the accompanying outlook comments were rather more hawkish than had been expected.

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The new number of rate cuts expected next year is now just two, from the previously guided four, with the central bank pointing to a new phase whereby cuts are less necessary given the strength of the underlying economy. This is pertinent to the Fed’s dual mandate, especially with employment expected to remain stable, and the potentially inflationary challenges ahead. As such, a reduction in January now appears to be off the table.

The projections completely wrongfooted the market, with the Dow Jones losing 2.6% and taking its losing streak to 10 days, which has not happened since 1974. The S&P500 and Nasdaq were lower by almost 3% and 3.6% respectively, with the losses amplified by stronger gains in the year up to this point.

Nursing a particular black eye was the Russell 2000 index, which fell 4.4%. Smaller and mid-cap companies rely more heavily on borrowing to fund investment in growing their businesses, and the Fed projections were a blow to the aspirations of lower rates next year of fuelling growth.

Even so, taken in the context of the gains made so far this year, the market falls were not only minimal but also possibly healthy as investors recalibrate their expectations. The Dow Jones remains ahead by 12.3% in the year to date, the S&P500 by 23.1% and the Nasdaq by 29.1%, where it remains to be seen whether the mega cap technology stocks will ride to the rescue in light of earnings which are increasingly seen as providing something of a defensive angle.

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Asian markets were unsurprisingly lower amid the Wall Street revelations where, apart from domestic issues in the likes of Japan and China, the threat of potential tariffs from the incoming US administration have weighed on prospects.

Comments from the Bank of Japan alongside its decision to keep interest rates unchanged pointed to the “high uncertainties” of the business outlook, especially with regard to commodity prices and indeed inflation generally. In the meantime, the no-change decision weakened the yen against the dollar, putting pressure on importers which are already showing some signs of decline.

Interest rate deliberations remain the central theme this week, with the Bank of England revealing its latest decision at midday today. The central bank has been between a rock and a hard place for some time now, given stubborn inflationary pressures and growth which has been lukewarm to non-existent over recent times. Despite any need for stimulus to the economy, inflationary pressures - such as strong wage growth which is likely to be exacerbated by the measures announced in the Budget - are likely to win the day, leading to a widely expected no-change decision as the bank errs on the side of caution for the time being.

Ahead of the decision, UK markets followed the global lead and sagged helplessly at the open. The markdowns were almost universal, with the largest falls being felt in the mining sector, as well as those with significant US exposure such as Barclays (LSE:BARC), Entain (LSE:ENT) and Ashtead Group (LSE:AHT), while Scottish Mortgage Ord (LSE:SMT) also made an unwelcome appearance given its own technology focus. British American Tobacco (LSE:BATS) was also lower having been marked ex-dividend, with some minimal strength in the defensive utility stocks and a weaker sterling offering virtually no resistance.

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The losses reduce the gains for the FTSE100 in the year to date to 4.8%, undoing some of the progress previously made. The premier index has now moved to being comfortably over 4% away from the highs recorded in May, with few prospects of a positive catalyst in sight.

The more domestically focused FTSE250 has borne the additional burden of being seen as something of a barometer for the wider UK economy, with its gains being pared to just 3.2% so far this year following this latest bout of weakness.