The Federal Reserve left its policy rate unchanged, with Chairman Jerome Powell saying “it may be some time before the outlook for jobs and inflation calls clearly for a change in [interest rate] policy.”
While investors had widely expected a soft tone from the central bank, “they came across as more dovish than what was expected,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management in a note.
European financials faced pressure from rising government bonds with the yield on 10-year German bonds falling to 0.052% from 0.08% late Wednesday as stocks and bonds mirrored similar moves in the U.S. after the Fed decision as the yield on 10-year U.S. Treasurys slid to 2.511% from 2.537%.
With financial institutions borrowing in the short-term and lending over longer time frames, central banks’ increasingly dovish monetary-policy briefings—aimed at soothing rattled investors—have kept yields below their recent highs.
Still, market moves differed from the reaction to similar dovishness from the European Central Bank earlier in the month, Mr. Jacobsen said. “The ECB’s was couched in terms of weakness. The Fed’s is couched in terms of caution.”
Early losses in Europe were tempered by buoyancy for the Stoxx 600’s basic resources and energy baskets—up 1.3% and 0.7%—with the slip in the U.S. dollar that followed the Fed’s decision boosting dollar-denominated commodities. Futures in Brent crude oil were last up 0.1% at $68.30 a barrel, extending their gains so far this week to 2.1%, while West Texas Intermediate futures remained 2.8% higher since Monday at $59.93 a barrel.
Futures put U.S. indexes on course to extend Wednesday’s losses at the opening bell, with the Dow Jones Industrial Average set to open 0.3% lower and the S&P 500 looking to open 0.2% lower.
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, fell 0.1% and extended its five-day losses to 0.9%, putting the dollar on course for a ninth day of losses from the past 10.
Wednesday’s stock market falls came after weeks of shallow trading for equities markets, with investors closely following economic data releases and awaiting news on trade negotiations between the U.S. and China.
After sharp selling in late 2018, stocks have rallied so far this year despite bond market signals that investors remain concerned about weak growth figures out of major global economies. That divergence is unlikely to continue, investors said.
“You can’t have a bond market saying the Fed’s going to have to cut rates and an equity market ignoring that,” said Larry Hatheway, chief economist and head of investment solutions at GAM Holding . “I tend to think the bond market is mispriced for the likely outcome, but in the next few days it’s the equity market that’ll have to parse.”
Gentle selling in Europe followed mixed trading in Asia. With Japanese markets closed for a public holiday, Hong Kong’s Hang Seng benchmark fell 0.9% Indexes in China, South Korea, and Taiwan staged gains of less than 1% despite President Trump’s comments that the U.S. expects to keep tariffs on Chinese goods in place for a “substantial period of time,” even after a trade deal.
Elsewhere, the British pound fell 0.2% against the U.S. dollar, relinquishing some recent gains as the U.K.’s attempts to leave the European Union faced fresh complications.
Prime Minister Theresa May asked the EU on Wednesday to delay its departure from the bloc until June 30, but EU leaders signaled their reluctance to back a postponement unless Mrs. May can win lawmakers’ approval of a Brexit deal they have already twice defeated.
Even with the U.K. still officially on course to leave the EU without a deal at the end of March, analysts played down the chances of victory for the prime minister’s deal on the third attempt and suggested a rising likelihood of a ‘no deal’ Brexit.
Market participants will parse the Bank of England’s interest rate decision and monetary policy statement, due later.