© Reuters. TV screens show the German DAX Index during a trading session at the Frankfurt stock exchange, amid the coronavirus disease (COVID-19) outbreak, in Frankfurt, Germany, December 30, 2020. REUTERS/Ralph Orlowski/Files
By Herbert Lash
NEW YORK (Reuters) -U.S. stocks initially rose and Treasury yields trimmed gains on Wednesday after the Federal Reserve raised interest rates by 50 basis points as expected and said it would begin to reduce its balance in June.
The U.S. dollar slid against the Japanese yen while the euro and Canadian dollar rose after the announcement that was unanimous by Fed policymakers was not viewed to too hawkish, as many had feared. Spot gold prices rose slightly.
But stocks on the tech-centric Nasdaq gave up initial gains as did MSCI’s all-country world index. Earlier, a rise in Treasury yields had hit growth stocks as the market anticipated the Fed’s rate hike.
“Although hawkish in its own right, the decision is somewhat dovish compared to the market’s lofty expectations,” said Michael Brown, head of market intelligence at Caxton in London.
Risk assets rallied, causing the U.S. dollar to “soften a touch, a classic ‘buy the rumor, sell the fact’ trade, while also sparking demand for Treasuries,” he said.
The yield on 10-year Treasury notes rose 1.5 basis points to 2.973%, after earlier rising to 3.011%.
On Wall Street, the Dow Jones Industrial Average rose 0.24%, the S&P 500 gained 0.04% and the Nasdaq Composite dropped 0.42%.
Earlier in Europe, stocks closed lower on disappointing earnings and investor uncertainty ahead of the Fed’s decision. The pan-European STOXX 600 index dropped 1.1%, with retailers leading sectoral losses, and major regional indexes also fell.
German 10-year government bonds traded near multi-year highs, hitting its highest yield since June 2015 at 1.036%, after European Central Bank board member Isabel Schnabel said a rate hike in July was possible.
Overnight in Asia many Chinese and Japanese stock markets were closed.
Oil prices jumped as the European Union, the world’s largest trading bloc, spelled out plans to phase out imports of Russian oil, offsetting demand worries in top importer China.
European Commission President Ursula von der Leyen proposed a phased oil embargo on Russia over its war in Ukraine, as well as sanctioning Russia’s top bank, in a bid to deepen Moscow’s isolation.
U.S. crude recently rose 5.43% to $107.97 per barrel and Brent was at $110.28, up 5.06% on the day.
The global monetary tightening cycle has reached a symbolic milestone, with yields on German, British and U.S. 10-year government debt topping 1%, 2% and 3% respectively, levels not seen in years. That in turn has raised borrowing costs for businesses and households.
The Bank of England is expected to lift British rates on Thursday by a quarter of a percentage point, which would be its fourth hike in a row to quell surging prices.
The Aussie dollar gained as much as 1.3%, and local shares fell, after the Australian central bank’s bigger-than-expected 25 basis point rate increase on Tuesday.