Oil and stocks fall as markets still rattled by Fed minutes

LONDON (Reuters) – The Federal Reserve’s doubts over the U.S. economic recovery kept markets in the red on Thursday, even though European stock indexes spent the morning recovering from initial losses.

Wall Street was knocked from its recent highs on Wednesday after the Fed’s minutes from its July meeting spooked investors by showing that the swift labour market rebound seen in May and June had likely slowed.

The S&P 500 had reached an all-time high earlier in the week as prices recovered to their pre-pandemic levels.

The sudden bearishness spilled into Asian markets overnight and continued in the European session, although shares started to recover as the morning progressed.

MSCI’s broadest index of Asia-Pacific shares outside Japan had its biggest daily decline in five weeks while the MSCI world equity index, which tracks shares in 49 countries, was down 0.6% at 1042 GMT.

The pan-European STOXX 600 fell 0.8% and London’s FTSE 100 was down 1.14%.

Several Fed policymakers said they may need to ease monetary policy to help get the economy through the coronavirus pandemic.

“It’s easy to forget that we’ve just experienced one of the largest and most severe economic shocks on record,” said Kaspar Elmgreen, head of equities at Amundi.

“This story is not over yet, despite what the markets might be indicating,” he said.

“We are navigating a ship here with unusually low forward visibility and a very wide range of outcomes.”

Despite the dovish minutes, U.S. Treasury yields and the dollar rose with investors focusing on parts of the minutes that showed policymakers downplaying the need for yield caps and targets.

The dollar index, which measures the currency against a basket of major peers, was choppy overnight and last at 93.015, up less than 0.1% on the day .

“The key question for investors is whether the policy responses are enough to mitigate the economic damage,” BH Global, a fund managed by Brevan Howard, said in an interim report published on Thursday.

“Many businesses face solvency risks that are not addressed by borrowing; a debt overhang cannot be cured by more borrowing no matter how cheap it may be,” the fund’s report added.

“Improved financial conditions are narrowly focused on a handful of large companies and benefiting stakeholders who need relatively little economic assistance. The result is that financial assets are expensive by many standard metrics.

“So long as a V-shaped recovery in risky assets fails to create a V-shaped recovery in economic activity, this tension is a recipe for increased volatility,” it said, adding that the U.S. presidential elections in November could be a catalyst for such volatility.

Spot gold rebounded overnight but fell when European markets opened.

It was down 0.2% at 1046 GMT, at $1,926.4615 per ounce.

Oil prices fell, as major producers warned of a risk to demand recovery.

OPEC and its allies pressed oil nations that are pumping above output targets to cut more in August to September.

Brent crude was down 49 cents, or 1.1%, at $44.88 a barrel, while U.S. oil was down 48 cents, or 1.1%, at $42.45 a barrel.

It will take at least two years for the euro zone to fully recover from its deepest recession on record, according to a Reuters poll of economists.

Minutes from the European Central Bank’s July meeting are due at 1130 GMT.

Germany’s benchmark 10-year Bund yield fell for the fifth day in a row, hitting its lowest in more than a week at -0.499%.

Markets also remained cautious about acrimonious U.S.-China relations.

China’s commerce ministry said the two countries have agreed to hold trade talks “in the coming days” to evaluate their Phase 1 trade deal, struck six months ago. [nL4N2FM1VF]

Major central banks will reduce the frequency of seven-day dollar liquidity operations to once a week from September due to low demand and reduced financial market tension, the Bank of England said. They are currently held three times a week and are often met with no demand.

Graphic: 2020 asset performance here

Graphic: World FX rates in 2020 here

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