US grim forecast spooks investors

THE Federal Reserve’s warning that the US faces a grim economic outlook jolted investors yesterday, driving down US stocks more than two per cent, while benchmark Treasury yields hit a more than 60-year low on the Fed’s announcement of a $400bn bond-buying programme.

The dollar rallied against the euro and the yen, buoyed by the prospect of higher short-term rates as a result of the Fed’s aim to push down longer-term interest rates by selling shorter-term notes and using the funds to buy longer-dated Treasuries.

The Fed’s bond-buying programme, dubbed Operation Twist, had been highly anticipated, but investors were spooked by the US central bank’s comment on the economy. The Fed, in its policy statement issued after the close of its two-day meeting, said, “There are significant downside risks to the economic outlook.”

“That headline of economic outlook – I don’t know why people are surprised to read that – but it seems to be what people are fixated on and that is what is driving the market lower,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

On Wall Street, the three major indexes ended more than two per cent lower. The Dow Jones industrial average was down 283.82 points, or 2.49 per cent, at 11,124.84. The Standard & Poor’s 500 Index was down 35.33 points, or 2.94 per cent, at 1,166.76. The Nasdaq Composite Index was down 52.05 points, or 2.01 per cent, at 2,538.19.

The MSCI world equity index slipped 2.3 per cent. The FTSEurofirst 300 index of pan-European stocks ended down 1.7 per cent, ahead of the Fed statement, while an index of emerging stocks lost 1.6 per cent.

Prices of long-dated US Treasuries rallied. Benchmark 10-year note yields fell to a 60-year low of 1.87 per cent, down from 1.95 per cent before the statement.

Thirty-year bonds, the longest US debt maturity, soared over three points in price with yields plunging to 3.01 per cent, the lowest since January 2009.

“This is good for Treasuries,” said Gennadiy Goldberg, interest rate strategist at 4Cast Inc in New York. “Whether this will create economic stimulus remains to be seen.”

The euro last traded down 1 per cent at $1.3569, while the dollar rose 0.4 per cent to 76.70 yen.

“The Fed did the minimum of what investors expected, and they have been punished for it,” said Kathy Lien, director of research at GFT in New York.