Tokyo stocks tumbled Thursday, with the benchmark Nikkei average falling to its lowest level in about 15 months after the U.S. Federal Reserve raised rates as expected and kept most of its guidance for additional hikes next two years, dashing investor hopes for a more dovish policy outlook.
The 225-issue Nikkei stock average closed down 2.84 percent, or 595.34 points, at 20,392.58, after shedding 3.3 percent at one point. The broader Topix index dropped 2.51 percent, or 38.99 points, to close at 1,517.16.
The Tokyo market opened lower, extending losses in U.S. shares amid worries the Fed would hike rates at a faster pace than expected, analysts said.
In addition to disappointment over the Fed meeting, “concerns over the slowing of the global economy also weighed on the market,” Okasan Online Securities said in a commentary.
Markets across Asia are nearing gloomy milestones, with the Topix and South Korea’s Kospi heading into bear market territory, or down over 20 percent from their recent highs, to join Shanghai and Hong Kong’s Hang Seng.
China’s benchmark Shanghai Composite and the blue-chip CSI 300 fell 1.3 percent and 1.5 percent, respectively, while Hong Kong’s Hang Seng was off 1.5 percent.
In New York, U.S. S&P 500 Index lost 1.54 percent to hit its lowest level since September 2017. U.S. stocks are on pace for their biggest December decline since 1931, when America was in the depths of the Great Depression.
“I think the Fed may be underestimating other factors at play,” said Bob Baur, chief global economist at Principal Global Investors in Des Moines, Iowa.
“Trade has been making headlines, but I think a gradual tightening of monetary policy has been the driving force behind recent market volatility. With corporate borrowing and spending still high, and the Fed continuing to reduce its balance sheet, I’d expect volatility to remain if this tightening continues,” he said.
The Fed raised key overnight lending rate rates by 0.25 point as expected to a range of 2.25 percent to 2.50 percent, after weeks of market volatility and calls by U.S. President Donald Trump for the Fed to stop raising interest rates.
It said “some further” rate hikes would be necessary in the year ahead, with its policymakers projecting two rate hikes on average next year instead of the three they saw back in September, a change that was also largely in line with expectations.
But the slight revision was not enough to ease market fears over a further U.S. economic slowdown on the back of trade tensions, a waning boost from tax cuts and tightening monetary conditions for companies.
U.S. junk bonds sold off sharply, with their exchange-traded funds falling 0.9 percent, the biggest decline since March 1.
As investors flocked to the safety of government bonds, the 10-year U.S. Treasurys yield fell below its May 29 low of 2.759 percent to as low as 2.750 percent, a level last seen in early April.
A rise in short-term interest rates and a fall in the long-date yield rekindled worries of an inversion in the yield curve, where shorter-debt yields become higher than longer-term ones.
Historically, an inversion between short yields, such as three-month and two-year yields, and 10-year yields has been seen as a fairly reliable indicator of a recession down the road.
“We expect additional rate hikes will invert the three-months to 10-year yield curve, which is a reliable signal for a bear market for stocks and a coming recession for both the U.S. and the rest of the world,” said Jeffrey Kleintop, chief investment strategist at Charles Schwab in Boston. “So, seriously something to keep a close eye on. We do expect a very difficult year for investors.”
The two-year U.S. yield stood at 2.656 percent, just 0.097 percent less than the 10-year yield. As one 25 basis point rate hike would likely invert the yield curve, many market players are skeptical whether the Fed can raise rates at all next year.
Fed funds futures are now pricing in only about 50 percent chance of one rate hike.
The dollar bounced back against major currencies after the Fed was perceived to be more hawkish than anticipated. The euro traded at $1.1383, off Wednesday’s high of $1.14395 before the Fed’s policy announcement. The dollar stood at ¥112.20, slightly off the seven-week low of ¥112.09 touched just before the Fed.
“Traders sold the dollar yesterday, on hopes today’s Fed would be even more dovish,” said Kengo Suzuki, chief currency strategist at Mizuho Securities.
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