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Global Market Report - 20 December

Lex Hall  |  20 Dec 2018Text size  Decrease  Increase  |  
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Australia

Australian shares are set for a tumble at the open after a fresh rate hike by the US Federal Reserve sent Wall Street stocks deep into the red.

The SPI200 futures contract was down 28 points, or 0.5 per cent, to 5570, at 8am Sydney time on Thursday, pointing to an opening drop for the benchmark ASX/200 as US stocks fell hard in late overnight trade.

Global markets gave up earlier gains after the Fed announced another interest rate rise, adding that "some" further rate hikes would be necessary in the year ahead.

On Wall Street, The Dow Jones fell 386.68 points, or 1.63 per cent, to 23,288.96, the S&P 500 fell 34.8 points, or 1.37 per cent, to 2511.36 and the Nasdaq Composite shed 161.74 points, or 2.38 per cent, to 6622.18.

US stocks are on track for their biggest December decline since the Great Depression in 1931.

Meanwhile, the Aussie dollar has extended its losses, hitting a new seven-week low 71.04 US cents, down from 71.93 US cents on Wednesday.

In local finance news on Thursday, Dulux Group and Incitec Pivot are scheduled to hold their annual general meetings, while November's Labour Force figures are due from the ABS at 11.30am Sydney time.

ASIA

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Asian markets closed flat in anticipation of the US rates decision and amid muted reaction to Washington and Beijing's efforts to seek an entente cordiale in the trade war.

The Shanghai Composite Index lost 1 per cent, or 27.09 points, to 2549.56. The Shenzhen Component Index lost 1.5 per cent, or 111.63 points to 7418.69.

The CSI 300 Index of big caps listed on both Shanghai and Shenzhen stock exchanges, fell 1.2 per cent, or 37.3 points to 3091.13.

In Hong Kong, the Hang Seng Index rose 0.2 per cent, or 51 points, to 25,865.39 in lacklustre trading.

Treasury Secretary Steven Mnuchin said America and China are planning to hold meetings in January to negotiate a broader trade truce.

EUROPE

European markets made modest gains across most sectors.

The pan-European STOXX 600 index closed up 0.3 per cent after four straight sessions of losses amid mounting fears of slower economic growth.

These fears were reflected by the decision of parcel service FedEx to cut its 2019 forecast. This in turn spooked its European rivals: Deutsche Post fell 4.2 per cent and Royal Mail lost 2.4 per cent.

Italian banks, meanwhile, rose 2.1 per cent after the European Commission reached a deal with Italy over its 2019 budget, avoiding disciplinary steps against Rome and ending months of verbal sparring.

This boosted the Milan bourse, which gained 1.6 per cent to lead European stocks. Paris’s CAC and Frankfurt’s DAX made modest gains of 0.5 and 0.2 per cent respectively.

NORTH AMERICA

The US Federal Reserve has raised interest rates and said it was keeping the core of its plan to tighten monetary policy intact even as central bank officials said they would likely slow the pace of further rate increases next year.

After weeks of market volatility and calls by President Donald Trump to stop increasing borrowing costs, the Fed on Wednesday lifted rates by a quarter of a percentage point.

Fed Chairman Jerome Powell also said the central bank would continue drawing down the size of its balance sheet by $US50 billion each month.

The rate increase, the fourth of the year, was expected, but Powell's comments on the balance sheet in a news conference, though a repetition of longstanding Fed policy, prompted a sell-off on equity markets.

The S&P 500 index was down about 1.6 per cent in late afternoon trading. Bond prices rallied and the dollar, weaker on the day before the decision, regained some ground against most major currencies.

By diminishing its bond market holdings each month, the Fed puts further upward pressure on interest rates, something Trump explicitly requested them this week to stop.

"I think the run-off of the balance sheet has been smooth and has served its purpose, and I don't see us changing that," Powell told reporters after the Fed raised its federal funds rate to a range of between 2.25 per cent to 2.50 per cent.

The central bank did bow to rising uncertainty about global economic growth, and expectations the US economy will slow next year, with fresh economic forecasts showing officials at the median now see only two more rate hikes next year compared to the three projected in September.

It noted that "some" further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs.

But another message was clear in the policy statement issued after the Fed's last meeting of the year and Powell's comments: The US economy continues to perform well and no longer needs the Fed's support either through lower-than-normal interest rates or by maintaining of a massive balance sheet.

In its statement, the Fed said risks to the economy were "roughly balanced" but that it would "continue to monitor global economic and financial developments and assess their implications for the economic outlook".

The decision to raise borrowing costs again is likely to anger Trump, who has repeatedly attacked the central bank's tightening this year as damaging to the economy.

The Fed has been raising rates to reduce the boost that monetary policy gives to the economy, which is growing faster than what central bank policymakers view as a sustainable rate.

There are worries, however, that the economy could enter choppy waters next year as the fiscal boost from the Trump administration's spending and $US1.5 trillion tax cut package fades and the global economy slows.

is senior editor for Morningstar Australia

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