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Europe is poised for a firmer open after the Fed, as expected, closed a chapter on its aggressive, pandemic-driven stimulus. In Asia, shares, Treasury yields and gold rose; the dollar drifted but oil extended its retreat.
European stocks are poised for steady gains on Thursday after the Federal Reserve approved plans to start scaling back its bond-buying stimulus program, helping Wall Street to push further into record territory.
The Fed concluded its two-day meeting and announced plans to end its bond-buying program but keep rates unchanged. Investors were prepared for the Fed to start dialing back its bond purchases and were focused on how the Fed approached rising prices. Powell put greater emphasis on the uncertainty facing the outlook for inflation and the Fed's statement described high inflation as "largely reflecting transitory factors."
"It was more dovish than markets expected," said Mona Mahajan, senior investment strategist at Edward Jones, of the outcome and press conference. "Anytime there's a whiff of lower rates, we tend to get favorable market reactions."
Powell said officials would wait to see how the economy evolves by the middle of next year but expects the supply chain logjams and inflation will abate by then. He also said he expects the labor market to recover further. "We want to see how that process unfolds as we decide what the true state of the economy is."
DeVere Group said global stock markets are bound to be volatile as monetary stimulus is removed.
"Investors should brace themselves for a 10% market correction over the next month as they grapple to get a sense of the Fed's thinking on interest rates."
DeVere said markets are pricing two or three rate increases next year, "and this could lead to a 5 to 10% market adjustment over the next month."
Pimco doesn't expect the Bank of England to tighten policy on Thursday, but is likely to raise its key interest rate in December or February instead. Read a selection of Pimco's comments here.
Stocks to Watch: Miners are making more money than ever before, but are spending little of it on mines. While some are planning to spend more annually in the next few years than they have in half a decade, the capex outlook for the world's "Big 4" miners for 2023 is only about half of the 2013 peak, said Liberum.
"Many management teams of the big miners have neither the mandate from shareholders nor the confidence in the long-term commodity demand growth outlook to engage greenfield investments." Memories of the last commodities bust are also "still very raw and real" for company executives and directors, said Liberum.
The dollar was little changed in Asia having eased slightly after the Fed's taper decision.
Wells Fargo said any impact on oil prices from the Fed's decision is likely to be reflected in movements in the dollar, so when the dollar strengthens crude-oil prices may fall since crude is priced in greenbacks. And assuming that to be the case, oil investors may want to pay more attention to economic data.
"The flexibility on tapering puts more onus on economic data, specifically inflation and employment data, to spur dollar gains on expectations of sooner/faster rate hikes," said analysts at Wells Fargo. "This raises the stakes for this Friday's and subsequent U.S. employment reports."
As the Fed starts tapering, Capital Economics said the doves seem to have the upper hand in U.S. monetary policy, as the central bank "is still insisting that the surge in inflation is 'largely' transitory."
The Fed said tapering could be accelerated or slowed depending on data, but Capital Economics noted the current pace would extinguish asset purchases by June. As the depiction of inflation as transitory continues, Capital Economics said Wednesday's communication was more dovish than expected and "despite surging market expectations, they support our view that the Fed won't begin hiking interest rates until early 2023."
The Bank of England is likely to keep monetary policy on hold until its policy meeting in February next year, said Columbia Threadneedle Investments.
That would allow policymakers to wait until data showing the impact of the end of the furlough scheme became available before raising the bank rate by 15 basis points to 0.25%, fixed portfolio manager Alexander Batten told Dow Jones Newswires.
Unlike November and February, there is no Monetary Policy Report in December which makes it a "challenging" month for delivering a rate rise, he said.
Long-end Treasury yields extended their climb in Asia, with yield on the 10-year note above 1.600%.
Yields climbed to their highest levels in more than week after the Fed's policy decision but despite the rise, the yield curve - a line plotting the difference between yields across maturities - flattened further. The gap between 5- and 30-year Treasury yields shrunk to 79.8 basis points on Wednesday, a level not seen since March 16, 2020.
"Markets were prepared for a far more aggressive taper than what was ultimately delivered - the Fed has zero intentions of draining liquidity too quickly and derailing the recovery," said Jamie Cox, managing partner for Harris Financial Group.
As central banks turn more hawkish, the U.S. 10-year real rate remains stuck at record all-time lows, leading Deutsche Bank to argue something besides monetary policy is driving rates, including "global excess savings."
Deutsche Bank said it follows "that the Fed meeting is unlikely to matter much," as its possible moves have been already flagged and "the market is already pricing a high chance of Fed hikes before tapering even concludes and financial conditions have proven impervious to front-end repricing anyway."
The bank said figuring out what is driving low real rates matters more.
Oil's losses extended into the Asian session, after official U.S. government data showed an increase in domestic crude inventories for a second week in a row.
"Ongoing subdued refining activity has led to another crude inventory build, despite ongoing strength in exports," said Matt Smith, lead oil analyst, Americas, at Kpler.
Crude prices were also weighed by news that the U.S. and Iran will resume talks later this month on reviving a nuclear accord after a five--month gap, said CBA. Iran's oil exports, which are currently around 100,000--200,000 barrels per day, could jump significantly and boost global oil supply if U.S. sanctions are lifted, CBA added.
The bank expects Brent oil to average around $85 per barrel in the fourth quarter, before declining through the first half of 2022.
Gold managed to recover some of Wednesday's losses Asian trade, finding some support from the Fed's taper plans.
Oanda said gold prices faced a plethora of resistance around the $1,790 level, "but that might not hold as investors will have to wait and see if the Fed is making a policy error."
Commerzbank analysts expect the Fed's plans to taper asset purchases will presage eventual interest-rate increases, weighing on gold prices.
Aluminum was higher on expectations the global market for the metal would swing to a deficit from an earlier oversupply, said Morgan Stanley.
The ongoing power crunch in China and the resulting increase in electricity prices, along with the country's decarbonization goals, are crimping aluminum supply, the bank said. China accounts for 57% of global aluminum supply, it noted.
Higher alumina prices are also adding to the cost of aluminum production, Morgan Stanley said.
TODAY'S TOP HEADLINES
Fed Dials Back Bond Purchases, Plots End to Stimulus by June
The Federal Reserve closed a chapter on its aggressive, pandemic-driven stimulus when it approved plans Wednesday to begin scaling back its bond-buying program this month amid concerns that inflationary pressures could last longer than officials expected earlier this year.
Fed officials agreed to wind down their $120-billion-a-month asset-purchase program by $15 billion each in November and December, a pace that could phase out the purchases entirely by next June.
House Democrats Add Paid Leave, State-and-Local Tax Deduction to Bill
WASHINGTON-House Democrats released an updated version of the party's social spending and climate package, adding back a paid-leave program that had previously fallen out of the bill and including a measure sharply raising the $10,000 cap on the state and local tax deduction.
The House bill, which top Democrats want to bring up to a vote in the chamber soon, is the latest proposal in the monthslong negotiations among Democrats over President Biden's agenda. But it is set to face changes in the Senate, where Sen. Joe Manchin (D., W.Va.) has objected to the inclusion of a paid-leave benefit.
Fund Manager Roundup: BOE Unlikely to Raise Rates This Week, Says Pimco
The Bank of England is likely to raise its key interest rate in December or February, rather than on Thursday, Peder Beck-Friis, portfolio manager at Pimco, tells Dow Jones Newswires in an interview. Very short-dated gilts should rally if the BOE leaves rates unchanged this week, while for longer-dated gilts the inflation and interest-rate forecasts will be more important. Below is a selection of Beck-Friis's comments.
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