ING analysts said March is too early for a rate hike.
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- US stock futures were wavering around the flatline Thursday in the wake of a Federal Reserve-inspired sell-off.
- The Fed is considering cutting its balance sheet — the “most notable development” in its minutes, an analyst said.
- Bitcoin fell 8% to about $42,000, as coming rate hikes may squeeze the liquidity that benefited crypto last year.
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US stock futures wavered Thursday, struggling to recover from a global sell-off prompted by signs the Federal Reserve is ready to be more aggressive on interest rate rises and in cutting back on support for the US economy.
Nasdaq futures were down 0.27% as of 6:10 a.m. ET, after technology stocks bore the brunt of Wednesday’s rout. Futures on the Dow rose 0.24%, while those on the S&P 500 were up 0.06%, suggesting a cautious start to trading later in the day.
With their hawkish tone, the Fed’s December meeting minutes released Wednesday burst the early-year calm in markets. Officials agreed that a tight job market and high inflation mean they may not wait for more people to return to work before hiking interest rates.
In mid-December, the US central bank said it would double the pace of tapering, or cutting back on its bond purchases, and signaled it would raise interest rates three times in 2022 to cool sky-high inflation.
The minutes suggest the Fed might now reduce its balance sheet, as opposed to merely pulling back on its emergency asset buying — a move to quantitative tightening, to cut the amount of liquidity in the market.
“The most notable development in the minutes undoubtedly came in the form of the Fed’s view on balance sheet reduction,” said Simon Harvey, senior FX market analyst at Monex Europe.
Major US stock indices retreated after the minutes, with the tech-centric Nasdaq falling 3% for its biggest daily drop in nearly a year. Wednesday’s losses came after a two-week rally for US stocks, during which the S&P 500 rose 5% to close at an all-time on Monday.
In Europe, stocks followed US markets lower. London’s FTSE 100 lost 0.4%, the Euro Stoxx 600 was down 0.9%, and Frankfurt’s DAX fell 0.9%.
Asian equities mainly dropped, too, as the US losses dented the regional outlook for corporate profit growth. The Shanghai Composite fell 0.2%, and Tokyo’s Nikkei fell 2.8%. Hong Kong’s Hang Seng added 0.7%.
Highly valued tech companies and real-estate names are among the sectors most sensitive to rising interest rates. Higher long-term rates increase borrowing costs and weigh on future earnings estimates for high-growth businesses. They also turn bonds into safer investments for institutional investors.
The 10-year US Treasury yield rose to 1.73% on Thursday, to its highest level since April 2021, after surging to 1.71% after the Fed news.
Analysts are now assessing when the Fed might make its first interest-rate hike this year. ING analysts James Knightley and Padhraic Garvey said March is too early for a rate increase, given the uncertainty caused by Omicron, but May is “clearly on the cards.”
“With several participants noting that the maximum employment objective has largely been met, and uncertainty over the recovery in the participation rate in the coming months, jobs data will be key in determining whether the growing consensus in money markets for lift-off at March’s meeting is the correct bet,” Harvey said in a note.
One key economic indicator, the monthly US jobs report for December, is due Friday. Private-sector job growth data from ADP out Wednesday came in at double the estimates and far outstripped November’s reading.
Bitcoin slumped as much as 8.5% to about $42,961, according to CoinGecko, in its worst day since the flash crash on December 4. Analysts said the Fed’s faster-than-expected rate hike puts at risk the liquidity that has benefitted many asset classes, including bitcoin.
In an inflationary period, market participants can expect some peaks and troughs along the way “as markets never move in a straight line,” and investors can expect to see bitcoin and other major cryptocurrencies “revert to an upward trajectory,” said Nigel Green, founder of investment firm DeVere Group.
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Read the original article on Business Insider 
