Something is off.

Over the past decade, any time the Fed, BOJ or ECB surprised the market dovishly, risk assets surged. And yet, when the ECB did just that on March 9, when Draghi unveiled TLTRO prematurely, the Stoxx slumped. And, more concerningly, after a brief rally yesterday at 2pm in kneejerk response to a Fed that has now fully capitulated on normalizing monetary policy and announced it will end its balance sheet runoff by September, US markets not only faded all gains, but closed sharply lower.

When commenting on the Fed’s decision, and the market’s surprising reaction, we said that it was too early to draw conclusions from the S&P’s reaction, where a blast of selling took place at precisely 3:30pm setting the dour mood into the last 30 minutes of trading. However, the overnight session which saw both European stocks struggle and U.S. equity futures slide despite some bullish sentiment in Asia, it appears that investors still have a some questions for Powell, among which the most important one: “What does the Fed know that nobody else does for it to capitulate so abruptly”, and what might be lurking in the shadows.

So far that answer is missing, and it explains why US equity futures have continued to sink despite a Fed which is now all in on reflating if not the economy, which by now it is clear it has little control over, then at least capital markets. Meanwhile, as risk assets are shunned, investors are plowing into safe havens as the yield on 10-year Treasuries extended Wednesday’s drop, rates slumped across Europe and gold jumped.

As European shares wilted and futures faltered, banks suffered the brunt of selling from the dovish doubling down, expressing traders’ usual worries about low borrowing rates, and dragging the European STOXX 600 down 0.2%, though London’s FTSE edged up as its miners were lifted by higher copper and metals prices.

But the real action was in the bond markets, where the stampede into safety continued, with the 7Y inches away from inverting below the effective Fed Funds rate.

With investors rushing to price in the prospect of US rate cuts later this year, which traditionally have been followed by a recession 3 months later, Treasury yields dived to their lowest since early 2018 and those on German Bunds – Europe’s benchmark – to the lowest since October 2016. Ten-year Bund were offering buyers virtually nothing again at just 0.048%. Alongside widespread ‘curve’ flattening – where shorter and longer-term borrowing costs converge – there were alarm bells ringing.

Rabobank strategist Philip Marey said the worry is that, having cut rates to the bone and already tried full-scale money printing, many central banks are now low on traditionally ammunition to fight recessions.

“The Fed has the most leeway because it has raised rates nine times so it could cuts rates nine times,” Marey said. “But it will be much more difficult for other central banks which haven’t even started to hike yet.”

Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.5%. Chinese blue-chips, which spent the morning swinging between small losses and gains, were up 0.4% in afternoon trade, while Seoul’s Kospi also added 0.4% as regulators announced plans to cut the stock transaction tax this year. Australian shares ended flat after see-sawing throughout the day. A drop in the jobless rate tempered market expectations of a rate cut. Markets in Japan were closed for a public holiday.

Meanwhile, in FX, after The Fed’s swerve sent the dollar sliding as far as 110.47 yen, with its 0.6 percent loss overnight the biggest drop since the flash crash of early January, the Bloomberg Dollar Spot Index rebounded sharply for the first time in five days as the greenback recovered some of the previous days losses as investors realized that if things are “this bad” in the US, they can only be far worse everywhere else, with the rest of the world only now starting to cut rates.

Despite the dollar’s rebound, it remains poised precariously on its 200-day moving average, and a sustained break would be taken as technically ‘bearish’, resulting in a slide that virtually every bank is expecting. “The downward pressure on U.S. yields continues to support our outlook for a weaker U.S. dollar this year,” said MUFG analysts in a note.

The pound saw the biggest decline as pressure built on Theresa May to gather a majority for her Brexit deal. The U.K. prime minister asked the European Union for a three-month extension to the March 29 deadline in a move that increases the risks of a no-deal departure. The Norwegian krone surged higher as Thursday’s top-performing G-10 currency after the Norges Bank followed the Federal Reserve in catching the market by surprise, but with a decision that was more hawkish than expected. The Norwegian krone rallied by the most since December versus the euro to touch a four-month high, after the Norges Bank hiked rates from 0.75% to 1.00%

The euro flew to a seven-week peak before things started to reverse in Europe. It was last trading at $1.1410, a world away from its recent low of $1.1177 while Brexit woes kept the pound down at $1.3175.

In other central bank news, also overnight, the Swiss National Bank kept rates on hold, cut its inflation forecast and said it will remain active in the currency market to curb any appreciation in the Swiss franc

Meanwhile, with the Fed now in the rearview mirror, trade concerns have returned, after President Trump on Wednesday warned that Washington may leave tariffs on Chinese goods for a “substantial period” to ensure Beijing’s compliance with any trade deal. China-U.S. trade talks are set to resume next week. Global growth worries extended to commodity markets, where oil prices, which had jumped Wednesday on supply concerns, retreated.

Brent (-0.3%) and WTI (-0.3%) are softer, and trade within a $1/bbl range. WTI did surpass the USD 60.0/bbl level overnight on the back of a dovish FOMC, however the complex has since drifted somewhat with WTI now trading just below the key level as fears about the global economy are dominating. Gold (+0.4%) is firmer, although off of session highs of around USD 1320/oz, on the back of dollar weakness after yesterdays dovish Fed, base metals more broadly have garnered support from the weaker dollar with copper rising 0.9 percent to $6,517 a tonne, having touched a near three-week high earlier in the session.

Elsewhere, Barclays note that the risks surrounding iron ore have not dissipated following the reopening of Vale’s Brucutu mine as two others have been temporarily closed recently and there is a risk of further mine closures.

Market Snapshot

• S&P 500 futures little changed at 2,826.75
• STOXX Europe 600 down 0.2% to 380.25
• MXAP up 0.5% to 161.13
• MXAPJ up 0.3% to 530.58
• Nikkei up 0.2% to 21,608.92
• Topix up 0.3% to 1,614.39
• Hang Seng Index down 0.9% to 29,071.56
• Shanghai Composite up 0.4% to 3,101.46
• Sensex up 0.06% to 38,386.75
• Australia S&P/ASX 200 up 0.03% to 6,167.17
• Kospi up 0.4% to 2,184.88
• German 10Y yield fell 4.2 bps to 0.042%
• Euro down 0.2% to $1.1395
• Italian 10Y yield rose 3.2 bps to 2.172%
• Spanish 10Y yield fell 4.9 bps to 1.115%
• Brent futures up 0.1% to $68.59/bbl
• Gold spot up 0.4% to $1,318.32
• U.S. Dollar Index up 0.3% to 96.06

Top Overnight News

• Federal Reserve Chairman Jerome Powell said interest rates could be on hold for “some time” as global risks weigh on the economic outlook and inflation remains muted. Officials also decided to slow the drawdown of the U.S. central bank’s bond holdings starting in May, then end them in September
• In a dramatic address to the nation from her 10 Downing Street office on Wednesday, Theresa May hinted that she could even resign rather than agree to a lengthy postponement that would keep the U.K. in the bloc beyond the middle of the year. An emergency summit has already been penciled in for next week when the EU could propose a long extension to the negotiations, but with conditions attached, potentially including ripping up May’s proposal, calling a British election and even a second referendum
• Bank of England policy makers face more paralysis amid turmoil over the date of Britain’s departure from the European Union. Officials are likely to vote unanimously to hold the benchmark interest rate at 0.75 percent when they announce their decision at noon in London Thursday
• President Donald Trump said he’ll keep tariffs on China until he’s sure Beijing is complying with any trade deal, refuting expectations that the two nations will agree to roll back duties as part of a lasting truce to their trade war
• Australian unemployment dropped to a decade-low in February, defying the worst housing slump in a generation that’s forced a sharp slowdown in economic growth
• Dutch Prime Minister Mark Rutte’s coalition government is set to lose its majority in the Senate, with anti-EU party Forum for Democracy making a strong debut, highlighting the challenge leaders face in tackling populism two months before key European Parliament elections
• New Zealand has banned military style semi-automatics and assault rifles and will establish a nationwide buyback of the weapons in the wake of a terrorist attack on two mosques that left 50 people dead
• Norway’s central bank raised its main interest rate for a second time since September and signaled there’s more tightening to come, as western Europe’s biggest oil exporter lets a rebound in crude prices steer monetary policy. The krone appreciated as much as 1.1 percent against the euro after the decision
• The Swiss National Bank kept rates on hold, cut its inflation forecast and said it will remain active in the currency market to curb any appreciation in the Swiss franc

Asian equity markets eventually traded mostly higher in the aftermath of a dovish FOMC, which immediately supported risk sentiment, although the gains in the major US indices were later pared due to underlying growth and trade concerns. ASX 200 (Unch) was subdued as financials tracked the underperformance of their US counterparts post-FOMC and with a broad subdued tone across most sectors aside from commodity-related names. Elsewhere, Hang Seng (-0.8%) and Shanghai Comp. (+0.4%) remained afloat with CITIC Securities suggesting increased possibility of a PBoC rate cut following the dovish Fed stance, although gains were capped amid lingering trade uncertainty as US President Trump recently suggested tariffs on China will be kept in place for a “substantial” amount of time after a trade agreement is struck to ensure Beijing holds up its end of the bargain. As a reminder, Japanese and Indian markets were shut for Vernal Equinox and Holi respectively.

Top Asian News

• China Closes in on Plane Order From Africa Amid Overseas Push
• Fed’s Longer Pause Opens Door for Asian Central Banks to Cut
• Philippines Holds Benchmark Rate as Inflation Eases Into Target
• China Mobile Slides to Biggest Loss Since October After Earnings

Major European indices are mixed, but are generally little changed [Euro Stoxx 50 U/C], following the dovish FOMC; which has led to underperformance in financial names with the sector significantly lagging its peers and the likes of Lloyds (-2.8%) and RBS (-5.3%) underperforming (RBS are trading ex-dividends). The FTSE 100 (+0.3%) has been supported from the open by a rebound in material names such as Fresnillo (+5.3%), Antofagasta (+2.6%) and Glencore (+2.2%); with the broader sector outperforming its peers in a turn around from the significant underperformance seen yesterday in the material sector which was attributed to Vale surpassing a key milestone in resuming production. Other notable movers include, Inmarsat (+2.1%) in the green after speculation surrounding a counterbid for the Co. after reports yesterday that investors made a bid valued at GBP 2.5bln. At the bottom of the Stoxx 600 are IG Group (-7.6%) after poor earnings figures and the Co. stating they expect FY revenue to be lower than the priors. Separately, Skanska (-2.6%) are lower as the Co. states that they are not likely to hit their 2019-20 construction margin target.

Top European News

• Feud Erupts at EssilorLuxottica After Del Vecchio Cries Foul
• Deutsche Bank Vows More Wealth Management Hires to Reverse Flows
• Ted Baker Falls After Meeting Lowered Full-Year Estimates
• Sweden Moves Closer to Divesting $7.5 Billion Telia Stake

In FX, In stark contrast to the dovish FOMC and steady SNB, the Norges Bank delivered the 25 bp hike flagged at the start of the year and signalled another ¼ point tightening for the 2nd half of 2019 before 2 more next year. The accompanying statement was also more upbeat/hawkish than most expected, with upgrades to growth forecasts and 2019 core CPI, while the Board added that the domestic economy may even expand faster than previously envisaged. Moreover, Governor Olsen went one step further by assigning better than even odds of a 25 bp hike in June, and Eur/Nok has slumped in response from around 9.6900 to just over 9.5900 at one stage.

• DXY – The broad Dollar and index have pared some post-Fed losses, albeit mainly due to several rival G10 currencies failing to build on gains at the expense of the Greenback. Indeed, Usd/majors are somewhat mixed as the DXY reclaims 96.000 status, just. To recap, the FOMC was more dovish than expected given no further policy normalisation this year vs 2 hikes previously and confirmation that QT will end sooner than planned, with a slower monthly run-off from May and end by September.
• NZD/AUD/JPY – The other big beneficiaries of Usd weakness, with the Kiwi reclaiming the 0.6900 handle and gleaning independent support to a mostly solid NZ Q4 GDP update, while the Aussie is firmly back above 0.7100 as sub-forecast jobs growth in February was countered by a near 8 year low unemployment rate. Elsewhere, Usd/Jpy has reversed sharply through 111.00 and to the lower end of a 110.75-30 range as US Treasury yields recoil in wake of the aforementioned Fed policy shift.
• CAD/CHF/EUR/GBP – All underperforming to varying degrees, as the Loonie failed to sustain momentum through 1.3300 and the Franc resists advances towards 0.9900 in wake of the SNB quarterly policy review that maintained a high value assessment of the Chf amidst still fragile FX market conditions and the ongoing need for NIRP alongside close monitoring and intervention if needed. Meanwhile, the single currency has faded ahead of 1.1450 having cleared a Fib level at 1.1420 temporarily, and now looks prone to hefty option expiries at 1.1400 in 2.8 bn, with further upside attempts potentially capped by similar size between 1.1415-30 (2.9 bn). Turning to the Pound, Brexit remains the overriding issue and currently a mainly negative factor given even more uncertainty surrounding the conclusion and whether the EU is willing to grant an A 50 extension. Indeed, Cable only got a knee-jerk lift from better than forecast UK retail sales data before extending losses from 1.3200+ to circa 1.3135.

In commodities, Brent (-0.3%) and WTI (-0.3%) are marginally softer, and remain affixed within a USD 1/bbl range. WTI did surpass the USD 60.0/bbl level overnight on the back of a dovish FOMC, however the complex has since drifted somewhat with WTI now trading just below the key level. Regarding the 9.6mln draw in EIA Crude Inventories reported yesterday, UBS note that this is bullish in respect to both the API’s 2.1mln draw and compared to the 5yr average for this period; of around +5.4mln. Gold (+0.4%) is firmer, although off of session highs of around USD 1320/oz, on the back of dollar weakness after yesterdays dovish Fed, base metals more broadly have garnered support from the weaker dollar with copper rising to around a 3-week high overnight. Elsewhere, Barclays note that the risks surrounding iron ore have not dissipated following the reopening of Vale’s Brucutu mine as two others have been temporarily closed recently and there is a risk of further mine closures.

US Event Calendar

• 8:30am: Philadelphia Fed Business Outlook, est. 4.8, prior -4.1
• 8:30am: Initial Jobless Claims, est. 225,000, prior 229,000
• 8:30am: Continuing Claims, est. 1.77m, prior 1.78m
• 9:45am: Bloomberg Consumer Comfort, prior 60.8
• 9:45am: Bloomberg Economic Expectations, prior 54.5
• 10am: Leading Index, est. 0.1%, prior -0.1%

DB’s Jim Reid concludes the overnight wrap

This week’s serenity in markets was broken yesterday by a dovish FOMC outcome and the latest Brexit developments. It’s hard to call anything surprising in Brexit terms unless we discovered that Aliens had landed on top of the Houses of Parliament and had taken over proceedings. Anything other than this might raise an eyebrow or two but not have much shock value given all the surprises seen in recent months.

Anyway, first the Fed. They lowered their interest rate projections for this year and next, with the median forecast now calling for zero hikes in 2019 and one in 2020. That was below the consensus expectation, and two- and ten-year treasury yields fell -7.3bps and -9.0bps respectively. That pushed 10-year yields to their lowest level since January 2018, with yesterday’s fall the sharpest since last May. Also helping this move was growth and inflation being revised down and UST bullish news on the balance sheet (more below). The sharp rally didn’t stop the MOVE treasury volatility index reaching a new all-time low last night. The dollar weakened steeply, falling -0.42% and to its lowest level since February 4. Equities had been trading much weaker, mirroring the moves in Europe (more below), but rebounded sharply and into positive territory after the dovish outcome but then faded again into the close. The S&P 500 and DOW were -0.29% and -0.55% weaker, respectively, while the NASDAQ eked out a +0.07% gain. That leaves Mr Powell 8-1 down in terms of US equities on FOMC days under his leadership. 7-0 in 2018 and 1-1 in 2019. Elsewhere Emerging markets outperformed after the Fed though, with equities up +0.16% and currencies gaining +0.69%.

Apart from the headline change in the Fed’s interest rate projections, they also lowered their growth and headline inflation forecasts. The median expectation is now for growth of 2.1% and 1.9% for 2019 and 2020, down from 2.3% and 2.0%. Headline inflation projections are at 1.8% and 1.9%, from 1.9% and 2.1%. So overall a slightly less optimistic baseline to underlie the lower interest rate path. At the press conference, Chair Powell maintained his recent rhetoric, noting that “growth is slowing somewhat more than expected” and “financial conditions remain less supportive.” He also cited the persistent inflation undershoot and downside risks from Brexit and trade as reasons for the pause in rate hikes. In light of these dovish changes, our US economics team has updated their Fed call, and now think that the Fed will remain on hold through end-2020. However, their economic forecasts are still a bit more robust than the Fed’s, so they think the risks to their new view are still skewed toward the next move being another hike rather than a cut. Their full meeting review is available here .

Finally, the Fed also announced updates to their balance sheet policy, with a gradual taper in the runoff now planned. The caps on Treasury runoff will fall from $30bn to $15bn in May, which will entail more reinvestments each month. The MBS portfolio will be rolled into Treasuries as they mature, which will provide a further boost to the Fed’s Treasury purchases. New purchases will match the existing maturity structure of the Treasury’s outstanding debt stock, so it should be neutral for the curve. The balance sheet will thefore stabilize starting in October, though the Fed will re-examine the policy again over the course of this year. At some point, they will resume asset purchases as well, to accommodate increased demand for currency while maintaining the same level of excess reserves.

Overnight, sentiment has improved in Asia with markets making modest advances after the dovish tilt from the Fed. The Hang Seng (+0.18%), Shanghai Comp (+0.61%) and Kospi (+0.28%) are all up. China’s onshore yuan is up +0.18% at 6.6825, marking the strongest level since July 2018. Elsewhere, futures on the S&P 500 are also up +0.08%. Japanese markets are closed for a holiday.

After the FOMC and press conference was over, all of us in the U.K. crowded round our TVs and stopped what we were doing as she made a planned televised address to the nation. To be fair there wasn’t much she hadn’t said before and she continues to double, triple and quadruple down on her strategy. She has asked the EU to extend the Brexit deadline until June 30, but was pretty insistent that she would not be willing to go beyond that date. It’s therefore hard to see her continuing in office beyond that date, if her deal can’t pass before then. Election risks must have risen in recent days.

Before this, PM May sent the EU a letter formally asking for an extension of the Brexit deadline to June 30th. European Council President Tusk said in a press conference that a short extension would be possible, conditional on the UK Parliament passing a deal. If the UK does not pass a deal, it appears that Parliament will face a choice of either a long extension, or a no-deal exit. Reuters also reported that a Commission document stated that the EU only wanted to offer one extension (as opposed to an extension of the extension situation). We’ll find out more after the EU council meeting today and tomorrow. EU officials confirmed that May’s request came too late to make a full decision on it at today’s EU council meeting which makes it likely that it won’t be approved by the EU today. It’s likely that the option is left open until at an emergency Council meeting next week with the duration of any extension contingent on whether or not May passes the MV next week. A reminder that the U.K. is currently still on course to leave a week tomorrow 1001 days after the original vote.

Sterling weakened as much as -0.91% as the various developments took place yesterday, but ultimately ended the session -0.59% weaker at $1.3190 partly as the FOMC weakened the dollar. Oliver Harvey published his latest update yesterday (available here ), where he turned neutral on the pound. He thinks the odds of a no-deal Brexit have risen to 20%, and now views a long extension of Article 50 as a net negative for the currency. Such an extension would alleviate the near-term risks around Brexit, but would raise the odds of a new election and would therefore inject new political and policy uncertainty into the UK.

Elsewhere yesterday, Brent crude oil prices rose +1.85% to a new four-month high at $59.83 per barrel after US inventories fell by 9.59million barrels. That takes the cumulative decline in US stockpiles this year to -1.9mn barrels, which is the biggest drop since 2003. Usually, inventories rise in the winter, with the 25-year average for this point in the calendar at +16mn. The move helped US energy stocks advance +0.89%.

Markets in Europe yesterday were broadly lower on the back of a number of stock specific stories. The CEO of UBS (-2.41%) called Q1 “one of the worst” in recent history, BMW (-4.94%) warned that earnings will decline “well below” last year’s level, and Bayer (-9.61%) lost a ruling over a weed killer case. A big slump for FedEx (-3.51%) following a profit warning Tuesday evening also contributed to the early weakness yesterday morning. The STOXX 600 eventually ended -0.90% while the DAX ended -1.57%, both with their biggest one-day declines since February 7th. In rates, Bunds nudged down another -1.3bps also.

Before we wrap up, the only data that was out yesterday of any note came in the UK where core CPI in February printed slightly below expectations at +1.8% yoy (vs. +1.9% expected), and down one-tenth from January. Headline CPI has a touch higher than expected but at 1.9% YOY its still below 2%. The March CBI total orders data was also slightly on the softer side having fallen 5pts to +1 (vs. +5 expected).

Looking at the day ahead, this morning in the UK we’ve got February retail sales and public-sector net borrowing due out. That comes before the BoE meeting where no policy change is expected and given all the Brexit developments it’s hard to imagine being much of a game changer. This afternoon we’ve also got the March consumer confidence reading for the Euro Area while in the US we’ve get the March Philly Fed business outlook print, latest weekly initial jobless claims reading and February leading index. In all likelihood, the biggest event for markets today will be the EU Council meeting.