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19.12.2024 11:12 AM
US stocks fell significantly on Wednesday, with all three benchmark indexes posting their biggest one-day declines in months, as the Federal Reserve's decision to cut interest rates by a quarter percentage point failed to meet some investors' expectations. The Fed's guidance for next year points to a more measured approach to monetary easing.
The Federal Reserve has cut its benchmark interest rate by 25 basis points, setting a range of 4.25% to 4.50%. However, the Federal Reserve's SEP suggests that the rate will be cut by just half a percentage point by the end of 2025. This estimate is based on the resilience of the labor market and the slowdown in inflation seen in recent months.
"Looking at the revisions to the economic forecast, it's clear that the Fed had no other choice," said Ellen Hazen, chief market strategist at F.L. Putnam Investment Management.
According to her, current economic data looks much stronger than previously thought. "The economy is performing much more strongly than expected, and that may be a reason for the Fed to pause on further action," she added.
Key US indices fell sharply into the red on Wednesday, showing significant losses. The Dow Jones Industrial Average plunged by 1,123.03 points (2.58%) and closed at 42,326.87. The S&P 500 fell by 178.45 points (2.95%) to 5,872.16, and the tech-heavy Nasdaq Composite lost 716.37 points (3.56%), stopping at 19,392.69.
The Dow Jones is experiencing its longest period of declines in decades: the decline has continued for 10 trading sessions in a row. The last time such a protracted series of losses was observed in October 1974, when the index fell for 11 days in a row. The Dow and S&P 500 also posted their biggest single-day percentage declines since August 5, while the Nasdaq posted its biggest single-day percentage decline since July 24. The performance put investors to the test.
The Russell 2000 index, which tracks small-cap stocks, plunged 4.4%. That was the sharpest drop since June 2022. Small-caps are traditionally considered more vulnerable to changes in monetary policy, but could benefit from lower interest rates going forward.
Despite the recent turmoil, U.S. stock markets are showing solid results overall for the year. The Dow is up 12.3%, the S&P 500 is up 23%, and the Nasdaq is up more than 29%. The surge was largely driven by gains in the tech sector, increased interest in artificial intelligence, and expectations of looser monetary policy.
Investor optimism was also fueled by hopes for deregulation in the upcoming change of administration. The new team led by President-elect Donald Trump is expected to offer a more liberal approach to economic policy, which could provide additional support to markets.
Investors are expressing concerns about the possible impact of Donald Trump's economic policies. Some of the proposed measures, such as the introduction of tariffs, could become a catalyst for a new wave of inflation.
The CBOE Volatility Index (VIX), which measures expectations of short-term market volatility, jumped 11.75 points to a four-month high of 27.62. This indicates growing nervousness among market participants who are reacting to uncertainty in the economic outlook.
The Fed's statement sent Treasury yields higher. The 10-year yield rose to 4.518%, the highest since late May. This added pressure to the markets.
Investment strategist Ross Mayfield of Baird commented: "The rise in bond yields, especially to 4.5% to 5%, has been a major challenge for the stock market. The question is how the markets interpret policy: as inflationary or growth-enhancing. Both scenarios have a strong impact on the 10-year outlook."
Markets continue to weigh the likelihood that the Federal Reserve will leave rates on hold at their January meeting. However, investors have revised their 2025 rate cut expectations down from a 49 basis point cut expected immediately after the Fed's announcement.
High interest rates remain a major headwind for the stock market. They make safer assets like bonds more attractive and also limit companies' ability to grow their profits. This pressure is especially noticeable amid the current market volatility.
Wednesday was a day of red for all 11 key S&P 500 sectors. The biggest losers were real estate, down 4%, and consumer discretionary, which plunged 4.7% to lead the decline. This reflects overall market weakness amid growing uncertainty.
Cryptocurrency-related stocks have seen a sharp decline, which accelerated after Federal Reserve Chairman Jerome Powell said the Fed is not allowed to own Bitcoin and has no plans to initiate legislative changes to do so. At the same time, rumors about the Trump administration possibly creating a national cryptocurrency reserve have caused additional turbulence.
Among the affected companies:
On the New York Stock Exchange, the number of decliners outnumbered the gainers by 9,489 to 1, while on the Nasdaq the ratio was 5.46 to 1. These figures indicate a massive outflow of investors from most assets.
The S&P 500 index recorded six new 52-week highs and 27 new lows. The Nasdaq Composite showed an even sharper contrast: 80 new highs versus 264 new lows, highlighting the scale of the current market swings.
Trading volume on U.S. exchanges amounted to 18.59 billion shares, which is significantly higher than the average of 14.36 billion over the past 20 trading days. Such an increase in activity indicates panic and rapid repricing of assets by market participants.
Asian stock markets fell on Thursday, tracking Wall Street's decline. The reason was a hawkish statement from the US Federal Reserve, which signaled that it will take a more restrained approach to rate cuts next year. Against this backdrop, the dollar reached a two-year high, while the yen weakened after the Bank of Japan decided to keep rates unchanged.
MSCI's broadest index of Asia-Pacific shares outside Japan lost 1.6%. Among the hardest hit:
The gloomy mood could also affect European markets. Morning index futures point to declines:
In currency markets, the Japanese yen hit a one-month low of 155.48 per dollar, a direct result of the Bank of Japan's decision to keep interest rates on hold. The yen traded around 155.3 per dollar, close to the weaker end of the year's range. The dollar's strength and Japan's relatively low rates continue to weigh on the national currency.
Investors are eagerly awaiting comments from Bank of Japan Governor Kazuo Ueda. His comments could shed light on the timing and size of potential rate hikes next year. Traders are currently forecasting a 46 basis point rate hike by the end of 2025.
The Fed's signal of restraint in rate cuts has become a driver of the dollar's rise. The dollar index, which reflects the strength of the American currency against its six main rivals, has reached its highest since November 2022. On Thursday, it was at 108.08.
The yield on the 10-year US Treasury note continues to rise, reaching a seven-month peak of 4.524% on Wednesday. The yield was last at 4.514%, adding to pressure on global financial markets.
Bitcoin temporarily fell below $100,000 after Fed Chairman Jerome Powell said the central bank was not interested in participating in government initiatives to accumulate cryptocurrency. The comment added uncertainty to the digital asset market.
The British pound held steady at $1.25835 ahead of the Bank of England's meeting. The central bank is expected to keep rates at current levels despite signs of slowing economic growth. This decision could affect the future dynamics of the British currency.
Gold regained ground, adding 0.8% to reach $2,609 an ounce. At the same time, oil prices went down, as the market is worried about a decrease in global demand, which is increasing pressure on energy resources.
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