WASHINGTON/LONDON Wall Street was broadly under pressure on Thursday and European shares fell for the first time in two weeks on hawkish signals from the U.S. Federal Reserve, even as U.S. technology stocks notched gains.
The U.S. dollar hit a two-month high and long-dated Treasury yields whipsawed, tumbling after initially spiking on Wednesday's surprise move from the Fed to raise interest rates at a much faster pace than expected.
U.S. jobless claims unexpectedly rose, briefly lifting bullion prices off the session's steepest losses. Crude oil futures tumbled from multi-year peaks, under pressure from the dollar.
The Dow Jones Industrial Average closed lower for a fourth straight session, down 0.62%, as the S&P 500 slipped 0.04%.
The tech-heavy Nasdaq Composite neared its lifetime peak hit on April 29, before closing up 0.87% as investors bet the economic recovery would boost demand.
Shares of Apple Inc, Microsoft Corp, Amazon.com Inc and Facebook Inc all shrugged off pre-market losses.
Europe's STOXX 600 snapped a nine-day streak of gains - its longest since 2017 - with a 0.12% dip and MSCI's gauge of global stocks shed 0.41%.
The Fed on Wednesday signaled it would now be considering whether to taper its $120 billion-a-month asset purchase program meeting by meeting, and downgraded the risk from the pandemic given progress with vaccinations.
Traders are "again buying Treasuries and technology stocks as the market continues to believe that, despite yesterday’s Fed meeting, the central bank is still planning on keeping interest rates near zero or extremely low for another 18-24 months," said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance in Charlotte, North Carolina.
Two-year and five-year notes, the most sensitive to interest changes, saw the largest yield increases on the hawkish Fed move.
Long-dated yields dropped as traders who were betting on the yield curve scrambled to cover their trades. Yields on 10-year bonds matched Wednesday's high of 1.594% before retreating.
JPMorgan analysts noted Fed Chair Jerome Powell had not been as aggressive in his news conference. He had described it as a "talking about talking about meeting," a reference to his protestations earlier this year that the Fed was not even "talking about talking about" tighter policy.
"It appears that faster progress toward reopening and higher inflation surprises revealed some hawks on the FOMC, but we suspect that leadership is predominantly anchored at zero or one hike in 2023," JPMorgan said, sticking with a prediction for tapering to start early next year.
Some are beginning to expect the Fed to dial back purchases sooner. Bond giant Pimco's U.S. economists said the tapering plan might now be announced as soon as September, and that it would take roughly six to nine months to wind down the stimulus.
"The more hawkish changes to FOMC participants’ rate path expectations came despite little change in the 2023 unemployment rate and inflation forecasts," Pimco said,"This suggests less tolerance for an inflation overshoot than previously thought."
Increasingly confident in the U.S. economic recovery, the Fed is seen most likely starting to taper in January, according to a Reuters poll.
"Given another strong rise in the upcoming May core PCE data, July’s FOMC could well bring a very hawkish outcome to this talk, especially if nonfarm payrolls for June are over 1 million and prior months are revised up significantly," John Vail, chief global strategist at Nikko Asset Management, said in a market note.
DOLLAR BREAKS FREE
The dollar broke out of recent tight ranges, surging to a two-month high as it extended Wednesday's 0.9% increase against a basket of currencies.
Colombia's peso led Latin American currency losses on Thursday, dropping 1.5% on the dollar's strength. Brazil's real was the outlier, holding near one-year highs on expectations of more central bank policy tightening.
Powell's hawkish turn prompted both Goldman Sachs and Deutsche Bank to abandon their calls that the U.S. currency would weaken against the euro, although others were not so sure.
Agnès Belaisch, chief European strategist of the Barings Investment Institute, said the fact that the Fed was not going to lift rates anytime soon was good for world growth and that FX markets would therefore get over Wednesday's shift.
"He (Powell) said they wouldn't do anything for the next two years, so it's a shock but wrapped in good news," Belaisch said. "I think he gave the markets the all-clear to rally."
The euro fell to $1.19035 from just over $1.20 in the Asian session after touching the lowest since mid-April.
Oil prices toppled from their highest levels in years on Thursday, pressured by the dollar's gains. The stronger dollar makes greenback-traded commodities more expensive to holders of other currencies.
Brent retreated 1.7% to $73.10 a barrel by 4:26 p.m. EDT (2026 GMT), while U.S. crude fell 1.64% to $70.76.
Precious metals sold off on Thursday. Spot gold dropped 2.2%. U.S. gold futures settled down 4.6% at $1, 773.80 an ounce after slumping to their lowest since late April.Meanwhile in New York
Conviction in the strength of the economic recovery pushed investors into U.S. technology stocks on Thursday, driving the Nasdaq higher, although a post-Fed hangover left a subdued S&P nursing a very minor loss.
The marginal decline was the S&P's third negative finish in a row, while the Dow - with a more pronounced drop - posted its fourth straight lower close.
Many investors were still processing the Federal Reserve's unexpectedly hawkish message on monetary policy from the previous day, which projected the first post-pandemic interest rate hikes in 2023.
Fed officials cited an improved economic outlook as the U.S. economy recovers quickly from the pandemic, with overall growth expected to hit 7% this year. While careful not to derail the recovery - with no end in sight for supportive policy measures such as bond-buying - the rate-rise signal highlighted concerns about inflation.
"I think there was a scenario that people had in mind, that the Fed was going to allow for a larger and longer inflation overshoot, and I think with the increase in the dot plot yesterday... people are rethinking that scenario," said David Lefkowitz, head of equities for the Americas at UBS Global Wealth Management.
Technology shares, which generally perform better when interest rates are low, powered a rally on Wall Street last year as investors flocked to stocks seen as relatively safe during times of economic turmoil.
Investors returned to such positions on Thursday. Chipmaker Nvidia Corp jumped 4.8%, posting its fourth consecutive record close, after Jefferies raised its price target on the stock.
Meanwhile, shares of Apple Inc, Microsoft Corp , Amazon.com Inc and Facebook Inc shook off premarket declines to advance between 1.3% and 2.2% as investors bet that a steady economic rebound would boost demand for their products in the long run.
The Nasdaq ended 13 points short of its record finish on Monday, but it was still the index's second-highest close ever.
The Dow Jones Industrial Average fell 210.22 points, or 0.62%, to 33,823.45, the S&P 500 lost 1.84 points, or 0.04%, to 4,221.86 and the Nasdaq Composite added 121.67 points, or 0.87%, to 14,161.35.
Interest rate-sensitive bank stocks slumped 4.3% as longer-dated U.S. Treasury yields dropped.
The strengthening dollar, another by-product of the previous day's Fed news, pushed U.S. oil prices down from the multi-year high hit earlier in the week. The energy index, in turn, was off 3.5%, the biggest laggard among the 11 main S&P sectors.
Other economically sensitive stocks, including materials and industrials, fell 2.2% and 1.6% respectively as data showed jobless claims rising last week for the first time in more than a month. Still, layoffs appeared to be easing amid a reopening economy and a shortage of people willing to work.
Volume on U.S. exchanges was 11.77 billion shares, compared with the 10.67 billion average over the last 20 trading days.
The S&P 500 posted 23 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 82 new highs and 37 new lows.- Reuters