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Asia: Markets step back following Federal Reserve's sobering outlook

[HONG KONG] Equities fell on Thursday after the head of the Federal Reserve gave investors a dose of reality on the outlook for the US economy, while the dollar faced fresh pressure on the prospect of interest rates being kept low for two more years.

Markets worldwide have been rallying for several weeks as lockdown measures are eased in key regions, and after governments and central banks pledged trillions of dollars in support to kickstart growth.

But after a much-anticipated meeting, the Fed laid out its view that the world's top economy would take time to fully recover from the worst global emergency in generations, which is expected to tip the planet into recession.

In a statement it warned the crisis "poses considerable risk to the economic outlook over the medium term", warning of a 6.5 per cent contraction this year and unemployment of 9.3 per cent.

It said it will keep borrowing costs at zero until the recovery from virus shutdowns is under way, with the median forecast of policy board members showing they expect the rate to stay the same through 2022 at least.

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Bank boss Jerome Powell said "the path of the economy is highly uncertain" and while last month's surprisingly good jobs report was "probably the biggest data surprise that anybody can remember", he noted that tens of millions of people remain out of work.

While the Fed reading was broadly in line with market expectations, it gave a jolt to traders who have been piling into stocks on hopes for a quick rebound.

Observers said it may have given traders reason to step back and focus on the divergence between market optimism and the reality on Main Street, which will eventually become Wall Street's problem.

Kerry Craig, at JP Morgan Asset Management, said: "While the median view of how the US economy may perform is not too distant from market expectation, it's worth noting there was a very wide range of views across committee members about the path for growth.

"So even as the economy is expected to contract by 6.5 per cent in 2020, it could be anywhere between -4 per cent and -10 per cent. This dispersion of viewpoints across the committee reinforces the uncertainty in just how the economy will fare post-Covid."

SECOND WAVE FEARS 

With ultra-low rates expected for the foreseeable future, the dollar fell against the yen on Wednesday and dropped further in Asia and has now lost more than two per cent this week.

The strength in the Japanese unit sent Tokyo stocks down 1.1 per cent in the morning session.

In other markets Hong Kong fell 0.6 per cent, having inched lower Wednesday for the first time in eight sessions, Shanghai dipped 0.1 per cent, while Sydney and Singapore each shed 1.9 per cent.

Manila, Wellington and Jakarta were also lower, though Taipei and Seoul were marginally higher.

The losses followed a negative lead from Wall Street where the Dow and S&P 500 slipped for a second day, though the Nasdaq broke 10,000 points for the first time.

Adding to the unease were fears of a second wave of virus in the US, just as states ease lockdowns, with Texas, Florida and California reporting spikes in new infections.

"While it is far easier to write a list of things the market doesn't care about right now, the second wave of coronavirus is the sum of all fears for the investors," said AxiCorp's Stephen Innes.

"Hence the adverse market reaction (to reports) that Texas surpassed 2,000 hospitalised coronavirus patients for the first time Tuesday. Frankly, this will be something that will haunt the market until a vaccine is in the hands of everyone around the world."

Attention is now on the release later in the day of US unemployment claims data, which will give a fresh snapshot of the economy following a blockbuster reading for May that showed a shock jump in jobs creation.

But Beata Caranci, chief economist at TD Bank, warned: "We have to have a little bit of caution" after the May report.

"Those businesses that reopened - even at reduced capacity - are naturally going to have demand for workers. The question is: do you get back to where you were before? And I think that's pretty far-fetched. There's a significant amount of people still displaced."

AFP

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