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Investors are in the grip of growth fears - BBVA

On Wednesday, the Federal Reserve rose the Fed Funds rate and changed growth forecast. The FOMC meeting lead to lower bond yields, a weaker dollar and a global decline in equity markets, showing that investors are in the grip of a growth scare, explained analysts at BBVA. 

Key Quotes: 

“The FOMC projections are unambiguous: the 2019 growth forecast has been revised downwards (the opposite happened in the September projections), the unemployment rate in 2020-21 is expected to be higher, the pace of further tightening is projected to be slower and the cyclical peak in the fed funds rate has been trimmed as well.”

“Foreign exchange markets have understood the message: the dollar weakened versus the euro, not because of a risk-on switch (which tends to be reflected in a stronger euro), but because of the prospect of monetary desynchronisation next year with the Fed slowing the pace of rate hikes and the ECB starting to hint at an upward move in rates.”

“Wall Street and equity markets globally didn’t like the message: when dovish guidance causes a decline in risky assets it is clear that investors are in the grip of growth fears. In that environment, ebbing concerns about rate hikes are of no avail. Corporate executives are also increasingly concerned, witness the decline in business sentiment and export expectations in Germany this week (IFO data).”

“However it could also reflect that the market focuses more on the decline of economic growth than on the forecasted level which should remain more than satisfactory (the FOMC projects 2.3% next year). Another reason is what Mario Draghi last week called ‘general uncertainty’: the underlying cause may evolve but uncertainty remains at a high level, or, as shown by company surveys, is even on the rise. This could imply that markets and companies focus on tail risk, rather than on the mean growth forecast.”

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