Published: Fri, June 16, 2017
Economy | By Annette Adams

Global shares fall on Fed rate hike, plunge in oil prices

Global shares fall on Fed rate hike, plunge in oil prices

The interest rate hike announced by the US Federal Reserve on Wednesday has so far failed to produce a major ripple effect in emerging market economies.

"Overall, nothing here to change our forecasts for another hike in September and then the balance sheet unwind to start later in December, given little apparent concern regarding the recent weak data", said Andrew Grantham, senior economist at CIBC Economics.

The Fed's rate hike could also have a negative impact on exporters to emerging markets, as higher interest rates in the U.S. usually prompt global investors to move their funds from emerging markets, including China, to the United States, observers said.

Gold got some support from safe haven buying after the Washington Post reported that Trump was being investigated by special counsel Robert Mueller for possible obstruction of justice.

"In view of realized and expected labor market conditions and inflation, the (Federal Open Market) Committee made a decision to raise the target range for the federal funds rate to 1 to 1.25 percent", said the Fed in a statement after concluding its two-day monetary policy meeting.

Under the plan it unveiled, the Fed would start with monthly reductions in Treasury holdings of no more than $6 billion and $4 billion in mortgage bonds.

The interesting point of announcing this carefully constructed plan now is that, should Yellen's four-year term that ends on February 3, 2018 not be renewed, then the next Fed Chair will struggle against the constrains of the program and find it hard to change the plan.

"They have taken a cautious approach to balance sheet normalisation, but they have begun it and it's definitely a tightening of policy", said ING strategist Martin van Vliet. The Swissy has reclaimed its broken bullish trend line, so it will be interesting to see if it will be able to climb back towards the top of its range again given the renewed hawkishness from the Fed.

The Standard & Poor's 500 index fell 12 points, or 0.5 per cent, to 2,425 as of 10:03 a.m. France's CAC40 Index fell 0.5 per cent, while the UK's FTSE 100 Index declined 0.7 per cent, and Germany's DAX Index retreated 0.9 per cent.

In New Zealand, first quarter economic growth was measured at 0.5 per cent versus the 0.7 per cent economists expected, putting annual gross domestic product at 2.5 per cent.

Japan's Nikkei fell 0.3 percent. "China needs to keep its interest rates stable", said Yu, an economist of the Chinese Academy of Social Sciences. The S&P energy index lost 0.7 percent. The dollar.DXY was largely flat against a basket of currencies after reversing earlier losses, while the price of gold fell. The Hang Seng in Hong Kong dropped 0.9 percent to 25,643.15. Fed members still expect one more rate hike in 2017 and three in 2018.

Later in the day, the bond market focus is likely to shift to Greece euro zone finance ministers meet to discuss a deal with the International Monetary Fund that could pave the way for new loans for Athens. Raising interest rates is seen as a mechanism to dampen the markets and choke off inflationary pressure by driving up the cost of borrowing.

Gulf Arab countries are struggling to bolster economic growth as oil prices fall and a strong dollar hurts industries such as tourism.

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