Dollar and Treasury Yields Surge on Fed Rate Hike

US dollar surged to its strongest level in 10 months versus the yen

The US dollar surged to its strongest level in 10 months versus the yen and advanced against a basket of global currencies on December 14th, 2016, after the Federal Open Market Committee (FOMC), which met in Washington on December 13-14th, 2016, increased its benchmark rate by a quarter percentage point to a range of 0.50% to 0.75% for the first time in 2016. The Fed has also indicated that it expects to hike rates three more times in 2017, as inflation expectations have increased considerably along with the strengthening of labor market conditions.

The dollar index, a measure of the currency against a weighted basket of peers, hit a 14-year high as the euro sank 1.1% to $1.0508, having traded above $1.06 before the Fed news. The greenback was up 1.7% versus the yen at a 10-month high of ¥117.12. Emerging-market currencies were the biggest decliners, while Asian index futures diverged amid the yen’s drop. The Sterling was down 0.8% against the stronger dollar at $1.2558, reversing gains that followed the release of UK labor market data and ahead of a Bank of England policy meeting on December 15th, 2016.

Reacting to the Fed rate hike, the yield on the policy-sensitive two-year Treasury note, which moves inversely to its price, jumped 10 basis points to 1.27%, the highest since August 2009, while the 10-year US yield was up 9 basis points at a two-year high of 2.52%. Treasury yields have risen sharply since Trump’s election win, as optimism surrounding possible inflationary policies such as fiscal stimulus and tax cuts have flooded the market.

Source: Bloomberg
Source: Bloomberg

Equities slump post Fed rate hike

In the other notable moves in the financial markets, US equities slumped the most since October 2016. Wall Street’s barometer, the S&P 500, witnessed much volatility after the Fed rate hike, falling 14.62 point, or 0.81%, to close at 2,253.28, with energy and utilities down more than 2%. The S&P 500 set a record closing high of 2,271.72 on December 13th, 2016.

After witnessing post-US election turbulence and seasonal tailwinds, the Dow Jones Industrial Average fell 118.68 points, or 0.60%, to 19,792.53 on December 14th, 2016, just 89 points away from hitting 20,000 for the first time, with Caterpillar Inc. (NYSE: CAT), 3M Company (NYSE: MMM) and The Boeing Company (NYSE: BA) contributing the most losses. The Dow’s 14-day relative strength index, a closely watched measure, closed at 87.4, well above the 70 level that marks the “overbought” threshold.

The NASDAQ composite dropped 27.16 points, or 0.5%, to end at 5,436.67. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 13.2.

d2d3Small-cap stocks were hit hard in the US, with the Russell 2000 Index down 1.3%. Asian index futures were mixed after the Fed’s statement, with contracts on equity gauges in Australia and South Korea signaling losses, while those on shares in Japan and Hong Kong advanced.

Gold, crude slumps

In a parallel development, energy was the worst-performing stock sector in the S&P 500, witnessing a drop of over 2%. West Texas Intermediate crude slumped 3.7%, halting a four-day rally to settle at $51.04 a barrel amid the dollar’s gains. US crude for January delivery fell 3.7% to settle at $51.04 per barrel, after the Energy Information Administration reported that stockpiles of crude fell by 2.56 million barrels in the week ended December 09th, 2016. The fall in crude stockpiles is the fourth successive decline, the longest run of draws since September 2016.d4

Gold for immediate delivery fell 1.4% to $1,142.95 an ounce, its lowest level since February 2016. Holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, have fallen about 10% since November 2016. Holdings declined again on Wednesday by 0.80% to 849.44 tons. Meanwhile, silver dipped 0.5% to $16.74 an ounce and platinum rose 0.3% to $926.24. Palladium was up 0.7% at $725, after falling over 1% on Wednesday.d5

Lastly, the Bloomberg Commodity Index dropped 0.3% as futures on sugar, cotton and soybeans fell by at least 0.4% on December 14th, 2016.

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