Negative Reaction To Fed Leads To Weakness On Wall Street - U.S. Commentary

(RTTNews) - With traders reacting negatively to the Federal Reserve's monetary policy announcement, stocks moved mostly lower in the latter part of the trading day on Wednesday. The selling was somewhat choppy, however, limiting the downside for the markets.

The major averages bounced well off their worst levels going into the close but remained firmly in the red. The Dow slid 114.02 points or 0.7 percent to 16,222.17, the Nasdaq fell 25.71 points or 0.6 percent to 4,307.60 and the S&P 500 dropped 11.48 points or 0.6 percent to 1,860.77.

The weakness on Wall Street came following the release of the Fed's policy announcement, the first under new Fed Chair Janet Yellen.

As was widely expected, the central bank announced its decision to scale back its asset purchase program by another $10 billion to $55 billion.

Traders were more surprised by a revision to the Fed's outlook for the federal funds rate, with the median forecast now calling for rates at 1 percent by the end of 2015.

The projections provided after the December meeting had a median forecast of 0.75 percent at the end of next year. The projection for 2016 was also upwardly revised to 2.25 percent from 1.75 percent.

With regard to the outlook for interest rates, the Fed also dropped its 6.5 percent unemployment target in favor of a broader range of indicators.

The Fed said its assessment of when to begin raising rates will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

"The latest FOMC statement resounds like a mea culpa from the Fed," said Gregory Daco, lead U.S. economist at Oxford Economics. "The Fed believes that the economy is strong enough to be gradually weaned off of asset purchases."

"However, it believes that despite the progress in the unemployment rate, the rest of the economy does not appear to have gained the sufficient strength to remove its crutches and raise the fed funds rate," he added.

Daco said he expects the Fed to continue pursuing its efforts to untie tapering from "rate hiking" and predicted that the central bank will begin raising rates around mid-2015.

Sector News

Gold stocks showed a substantial move to the downside on the day, dragging the NYSE Arca Gold Bugs Index down by 4.1 percent. With the loss, the index pulled back further off the six-month closing high it set last Friday.

The weakness among gold stocks came amid a sharp drop by the price of the precious metal, with gold for April delivery tumbling $17.70 to $1,341.30 an ounce.

Significant weakness also emerged among commercial real estate stocks, as reflected by the 2 percent loss posted by the Morgan Stanley REIT Index. The steep loss pulled the index down to its lowest closing level in over a month.

Tobacco, utilities, oil and biotechnology stocks also came under pressure, moving lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Wednesday. Japan's Nikkei 225 Index rose by 0.4 percent, while Hong Kong's Hang Seng Index edged down by 0.1 percent.

The major European markets also ended the day mixed. While the German DAX Index advanced by 0.4 percent, the U.K.'s FTSE 100 Index fell by 0.5 percent and the French CAC 40 Index dipped 0.1 percent.

In the bond market, treasuries pulled back sharply following the Fed announcement, closing firmly in negative territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, jumped 9.1 basis points to 2.772 percent.

Looking Ahead

Trading on Thursday may continue to be impacted by reaction to the Fed statement, potentially overshadowing the release of a slew of U.S. economic data on weekly jobless claims, existing home sales, and Philadelphia-area manufacturing activity.