US and European stocks went into the Easter break on a downbeat note after a week in which expectations mounted that the Federal Reserve could raise interest rates more aggressively than previously thought.
Such thinking helped the dollar continue to regain some of the ground lost after the US central bank came out with a far more dovish policy statement following its March 16th policy meeting than market watchers had anticipated.
In turn, that helped push prices for oil and other industrial commodities sharply lower, with both Brent and West Texas Intermediate crude slipping back below $40 a barrel and copper heading for its biggest weekly fall since mid-February.
Gold suffered too, with the metal on track for its worst week since November.
By midday in New York, the S&P 500 was down 0.3 per cent at 2,029 and heading for a four-day drop of 1 per cent – bringing a run of five successive weekly gains to an end. The decline left the equity benchmark back in negative territory for the year.
The CBOE Vix volatility index – often described as Wall Street’s “fear gauge” – was up 6.4 per cent at 15.90, having ended the previous week at its lowest closing level since August.
The shocking events in Brussels on Tuesday had only a limited effect on European markets.
Instead, much of the weakness for equity indices came as a result of falling oil prices as the dollar strengthened and fresh signs emerged that the global supply glut was intensifying.
Data out of the US on Wednesday showed crude inventories reaching record levels for a sixth successive week.
Brent, the international crude benchmark, was down 0.6 per cent on Thursday at $40.22 a barrel, having earlier fallen as low as $39.22. WTI was down 1.7 per cent at $39.13. For the week, Brent was down 2.4 per cent.
The Fed’s “dot plot” interest rate projections pointed to just two increases this year, rather than four pencilled in last December – a surprisingly dovish outcome that put it more in line with market thinking.
But, as Rabobank strategist Elwin de Groot highlighted, "although the FOMC toned down its rate projections, several members have been quick to point out that rates could still go up as early as April.
“Amongst them was [St Louis Fed president James] Bullard, who said that largely unchanged economic circumstances may still warrant an April move,” he said, while acknowledging, that “according to Fed futures, the implied probability for an April hike is still only 6 per cent.”
And there appeared to be plenty of scepticism about a Fed move next month in the Treasury bond market.
The policy-sensitive two-year yield, while up 2 basis points on Friday at 0.87 per cent, was just 3bp higher on the week - and way below the 1 per cent struck just before the Fed’s statement was released.
The yield on the 10-year note was 2bp higher on Friday at 1.90 per cent and 3bp higher on the week.
The equivalent maturity German Bund ended the week at 0.18 per cent, down 2bp on the day and 4bp over the previous four days.
Gold came under heavy pressure from the dollar’s strength, as a bout of haven buying on Tuesday proved shortlived. The metal $33 on the week, a drop of 2.6 per cent – its worst such decline since November.
Capital Economics noted: “Despite this week’s setback, the price of gold has recently started to benefit from a revival of demand for inflation hedges.
“This has at least partly offset some of the downside risks from renewed dollar strength.”
Base metals also had a grim time of it. Copper shed just 0.1 per cent in London on Friday to $4,945 a tonne – but was down 1.9 per cent over the four days, its worst weekly showing for six weeks.
Copyright The Financial Times Limited 2016
