U.S. stock market sharply declined by the end of yesterday's volatile session, as the Fed decided to increase interest rate on a faster pace than initially expected.
The Fed's decision to hike interest rate for the first time since December 2015 was universally expected by the market because it was thoroughly discussed in the previous months, yet the commission puzzled investors with the plan to complete three more rate increases in 2017. Overnight yesterday, the Federal Reserve raised its key short-term rate by 0.25% to between 0.50% and 0.75%, with another 0.75% hike divided in three parts expected by the end of 2017. According to the experts, market participants generally expected a maximum rate hike of 0.50%, if any at all. This is the first rate increase since last December and the second since 2008.
”Three rate increases next year is something of a surprise, and it may take some time for investors to digest that,” an analyst Mike Loewengart told MarketWatch.
All three major indexes, S&P 500 (INDEX: US500), Dow Jones Industrial (INDEX: DJIA) and Nasdaq Composite (NASDAQ: NDAQ) had briefly gained before turning lower as Janet Yellen opened the press conference. Despite previously hitting record-highs, the Dow lost 118.68 points to 19,792.53 while Nasdaq Composite tumbled 0.5% or 27.16 points, to 5,436.67 by the end of the day yesterday. The S&P 500 dropped by 0.8% to 2,253.28. For S&P 500, this was the largest one-day decline since the beginning of October, reports Reuters. Among these, S&P utilities index and energy index suffered the most losing 2% and 2.1% on the news, respectively.
Next to that, financial stocks also negatively reacted to the rate hike and the agenda for the next year by losing 0.6% after the conference. MarketWatch experts explain that the banking sector is particularly sensitive to rate hikes, especially when there are three more to come, because they bring drastic changes to banks' business models. Among the commodities, gold was affected the most as it closed the session at its 10-month lows losing $22.80.
"The outlook for gold is not particularly great. The more hawkish comments from the Fed are clearly a headwind in the short-term. The selling seen this morning is just the start of things to come," an ANZ analyst Daniel Hynes told Reuters.
Asian markets were also weighed down by the news as they opened lower at the early trading today. Australia's S&P/ASX 200 index (IND: AS51) as well as South Korea's Kospi (IND: KOSPI) and Shanghai Composite (INDEX: SHCOMP) all slipped about 0.8%, says the Wall Street Journal. Hong Kong's Hang Seng Index (INDEX: HSI) was down 1.8% whereas its Property Index lost 2.6%. Similarly, China's yuan was down almost 0.4% against the American dollar at the Asian open today.
Dollar's best day in years
The dollar was one of the main gainers yesterday, as it typically benefits from higher interest rates while putting pressure on currency-dependent commodities like gold. Shortly after the Fed announced its rate hikes agenda for the next year, the dollar reached its 10-month peak against yen at 117.87. By the European open today, the dollar hit the 14-year high indicating a favorable reaction of the domestic currency to the rising rates, said the Wall Street Journal. Another major jump was coming from two-year Treasury yields that hit their highest level since 2009 whereas the three-year notes jumped to their 6-year highs. Likewise, the five-year yields reached their highest since 2001.
The experts said that the unexpected decision of the Federal Reserve to raise the interest rates three times throughout 2017 aligns with Donald Trump's policy perspectives. Multiple rate hikes could be regarded as Central Bank's statement that the U.S. economy is strong enough to handle such frequent increases while Trump's plan to carry out out a round of tax cuts and boost infrastructure investments that could strengthen the U.S. GDP seems to go along the similar lines.
“A December increase was almost certain, following the unexpected decision in September to delay raising the rate. Inflation expectations in the US are rising due to the economic policies proposed by US president-elect Donald Trump," an analyst Andrew Sullivan told South China Morning Post.
Fed Chairwoman Janet Yellen said during yesterday's news conference that the Central Bank's move should be perceived as a "reflection of confidence we have in the progress that the economy has made our judgment that that progress will continue".