Global stocks slide on Fed's statement; US dollar rallies

New York: US stocks slid and benchmark Treasury yields hit a more than 60-year low, after the Federal Reserve announced a $400 billion bond-buying program to spur growth as it warned of a grim economic outlook.

The US dollar rose broadly after the Fed announcement, reversing losses against the euro. The bond-buying program will not lower the value of the greenback because the action will not require printing of new dollars, analysts said.

In an effort to lower long-term interest rates and help the housing sector, the US central bank said it will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes to purchase longer-dated Treasuries.

But the US central bank spooked investors with its comment on the economy. The Fed, in its policy statement issued after the close of its two-day meeting, said, “There are significant downside risks to the economic outlook.”

“That headline of economic outlook — I don’t know why people are surprised to read that — but it seems to be what people are fixated on and that is what is driving the market lower,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

On Wall Street, the three major indexes all fell sharply, though the Dow had briefly turned positive after the Fed statement.

The Dow Jones industrial average dropped 212.14 points, or 1.86 percent, to 11,196.52. The Standard & Poor’s 500 Index dropped 25.98 points, or 2.16 percent, to 1,176.11. The Nasdaq Composite Index dropped 29.37 points, or 1.13 percent, to 2,560.87.

The MSCI world equity index slipped 1.5 percent. The FTSEurofirst 300 index of pan-European stocks ended down 1.7 percent at 918.06, ahead of the Fed statement, while an index of emerging stocks lost 1.2 percent.

Prices of long-dated US Treasuries rallied. Benchmark 10-year note yields fell to a 60-year low of 1.87 percent, down from 1.95 percent before the statement.

Thirty-year bonds, the longest US debt maturity, soared over three points in price with yields plunging to 3.04 percent, the lowest since January 2009.

“This is good for Treasuries,” said Gennadiy Goldberg, interest rate strategist at 4Cast Inc in New York. “Whether this will create economic stimulus remains to be seen.”

Long dollars

The euro last traded down 0.5 percent at $1.3633, while the dollar rose 0.3 percent to 76.65 yen

“The Fed did the minimum of what investors expected, and they have been punished for it,” said Kathy Lien, director of research at GFT in New York.

“Investors are losing confidence in the central bank because they keep on coming up short. They are now buying back dollars and positioning for a prolonged period of slower global growth.”

The euro had earlier gained versus the dollar after Greece outlined key measures to help alleviate the country’s fiscal problems.

A Greek government spokesman said decisions taken on Wednesday would enable Greece to comply with all its obligations to the European Union and International Monetary Fund until 2014. The spokesman added that Greece will remain part of the euro zone.

The dollar also jumped to session highs against the Australian dollar and sterling. The Aussie dollar last fell 1.7 percent to $1.0088, while sterling lost 1.3 percent to $1.5534.

US crude oil fell $1 to settle at $85.92 a barrel ended lower as analysts deemed the Fed’s easing measures insufficient to jump-start the stalling US economy.

London Brent oil slipped 18 cents to settle at $110.36 a barrel.

Spot gold fell to $1,785 after the Fed.

Reuters