Equities fall, bond yields rise after hawkish Fed statement

US bond yields rose and stocks sold off after a US Federal Reserve statement following its two-day policy meeting made it clear that the world's largest central bank still sees a December rate increase as a possibility.

The Fed kept US rates at their long-term record lows, but what stood out in the statement was a specific reference to conditions necessary "to raise the target range at its next meeting." It said it will assess the progress towards maximum employment and two per cent inflation, same as its September statement, but the reference to a particular meeting is rare for the Fed.

Wall Street gave up most of its gains in the wake of the statement, while bond yields rose, particularly in the short-end of the yield curve, in anticipation of tighter policy.

"The statement is as expected. We knew they weren't raising but they had to move away from dovish statement that focused on China and Asia last time and grease the skids for a December increase," said Paul Schatz, president and chief investment officer at Heritage Capital in Woodbridge, Connecticut.

Markets currently see around a 47 per cent chance it will raise rates this year, and the Fed has made it clear that the data will determine the policy. Still, markets took a more hawkish view of the Fed's statement.

The two-year Treasury note fell 5/32 of a point to boost its yield to 0.72 per cent, its highest in a month. Five- and three-year yields also hit one-month highs. The dollar rallied more than 1 per cent against the euro.

The Dow Jones industrial average rose 15.76 points or 0.09 per cent to 17,597.19, the S&P 500 gained 3.05 points or 0.15 per cent to 2,068.94 and the Nasdaq Composite added 9.40 points or 0.19 per cent to 5,039.54.

The dollar index was close to a 2-1/2-month high at 96.61 as the ECB's easing hints kept the euro pinned at $1.1080 and the yen barely budged at 120.50 yen to the dollar.

Oil rebounded from earlier losses after the US Department of Energy's Energy Information Administration (EIA) showed less stockpiling of resources than some feared. Brent gained 4.6 per cent to $48.97 a barrel, while US crude gained 5.8 per cent to $45.87 a barrel.

European shares gained 1.1 per cent.

ECB signal

Sweden's Riksbank was the latest central bank to boost stimulus through monetary policy, adding another $7.6 billion to its asset-buying programme.

The move underscored just how much the Fed would be going against the flow if it raised rates, and stands as the first reaction to what looks set to be another increase in stimulus from the European Central Bank in December.

The move sent Sweden's 10-year government bond yields to two-month lows and pushed Stockholm's stock market towards a two-month high. The crown also briefly hit a two-month low against the euro before a rebound.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9 per cent as Shanghai stocks lost 1.7 per cent, Hong Kong's Hang Seng fell 0.8 per cent and Indonesia's dropped 1.4 per cent.

Tokyo's Nikkei rose 0.6 per cent on bargain hunting following the previous day's fall.

COMMENT NOW