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Asian Shares Tumble after Fed Challenges Investor Optimism; Aussie Shares Plunge 3%

James Hyerczyk

The major Asia-Pacific stock indexes were down across the board on Thursday after the U.S. Federal Reserve challenged investor optimism with a gloomy prediction the U.S. economy would shrink 6.5% in 2020 and unemployment would still be at 9.3% at year’s end. Still, stock losses were modest given the scale of their recent rise.

Although the downbeat economic outlook from the U.S. Federal Reserve stoked speculation it would have to add to already historic levels of stimulus to safeguard recovery, investors still decided to book profits. In this case, the promise for more stimulus was interpreted as bearish because it may be an indication that the economy is not on the fast-track to recovery as investors have hoped.

On Thursday, Japan’s Nikkei 225 Index settled at 22472.91, down 652.04 or -2.82%. Hong Kong’s Hang Seng Index finished at 24480.15, down 569.58 or -2.27% and South Korea’s KOSPI Index closed at 2176.78, down 18.91 or -0.86%.

In China, the Shanghai Index settled at 2920.90, down 22.86 or -0.78% and in Australia, the S&P/ASX 200 Index finished at 5960.60, down 187.80 or -3.05%.

Fed Chair Jerome Powell:  ‘Not Even Thinking about Raising Rates’

Shortly before the Fed announcements, data showed core U.S. consumer prices fell for a third straight month in May, the longest stretch of declines on record.

As a result, Fed Chair Jerome Powell said he was “not even thinking about raising rates”. Instead, he emphasized recovery would be a long road and that policy would have to be proactive with rates near zero out to 2022.

The Fed did not commit to any new actions at this meeting with most of the focus on downside risks and uncertainty in the economy. This assessment seemed to splash water on the V-Shaped recovery theory being pushed by stock market investors.

Furthermore, it left the door open for further stimulus measures, perhaps as early as September. Policymakers did not indicate they would try to flatten the yield curve, but comments indicate they may be open to moving to some form of interest rate caps.

Australian Shares Plunge More Than 3 Percent

The Australian stock market was notably lower on Thursday after the Federal Reserve projected a sharp contraction for the U.S. economy this year due to the coronavirus pandemic and indicated that interest rates are likely to remain at current near-zero levels through 2022.

In addition, the Organization for Economic Cooperation and Development or QECD said the global economy is undergoing the deepest recession since the Great Depression in the 1930s due to the COVID-19 pandemic.

The big four banks were among the major losers. ANZ Banking, National Australia Bank and Westpac were lower by 3.1 percent to 3.4 percent, while Commonwealth Bank was lower by more than 2 percent.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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