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Need to Know: Stock markets have now seen the ‘peak of Fed stimulus’ unless these two things happen

Investors were left disappointed by the Federal Reserve’s action - or lack of - late Wednesday as the central bank failed to indicate any new stimulus. Read More...

US Federal Reserve Chairman Jerome Powell said more fiscal stimulus from Congress was expected.

Eric Baradat/Agence France-Presse/Getty Images

It looks set to be a tough day for markets.

Investors were left disappointed by the Federal Reserve’s action – or lack of – late Wednesday as the central bank failed to indicate any new stimulus. The Fed said it planned to hold interest rates at nearly zero until the end of 2023 at the earliest, as chairman Jerome Powell gave a cautious outlook. U.S. jobless claims fell from 893,000 to 860,000 in the week of Sept. 6 to Sept. 11. However, the uninspiring data failed to invigorate markets as the Dow Jones Industrial Average DJIA, -0.48% slipped 0.6%, or 158 points in early trading.

In our call of the day, Lena Komileva, chief economist at G-Plus Economics, said markets have now seen the “peak of Fed stimulus,” barring a government error or market shock.

“The Fed’s new inflation framework has not led to a new policy regime, or fresh action, but to a flatter policy cycle that still provides greater reflationary stimulus against the economy’s adjustment to a new with-Covid normal,” she said.

“This reinforces our view that, barring a new exogenous shock to the economy, or a fiscal policy error failing to bring fresh support to the recovery beyond the November elections, markets have seen the peak of Fed stimulus,” Komileva added.

With no signs of further measures from the Fed, AxiCorp market analyst Milan Cutkovic said the spotlight would now be on Congress over a new stimulus package, with further delays potentially impacting markets.

“The focus will now shift back to the U.S. Congress, where Democrats and Republicans are still struggling to agree on a stimulus package. Investors are becoming increasingly impatient with the lack of progress, and market sentiment could turn sour if there is no deal soon.”

Goldman Sachs GS, -1.12% economist David Mericle noted that while Powell said more fiscal stimulus from Congress was expected, there were risks in both directions. Mericle added that a Democratic sweep in the election would likely mean “substantial further stimulus,” while a failure in negotiations over a new stimulus bill this month and a divided government after the election would “raise the risk of a slower recovery.”

The markets

After a slight rise on Wednesday the Dow Jones Industrial Average DJIA, -0.48% was 0.6%, or 158 points, down shortly after the open, recovering from initially heavier losses. The tech-heavy Nasdaq Composite COMP, -1.58% was 1.1% lower and the S&P 500 SPX, -0.92% slipped lower as traders reacted to the Fed’s cautious global economic outlook.

European stocks also fall in early trading, with the pan-European Stoxx 600 SXXP, -0.54% 0.6% down, the German DAX DAX, -0.49% 0.6% lower and the FTSE 100 UKX, -0.18% falling 0.8%. Rising coronavirus cases in countries across the continent also contributed to the negative sentiment.

The buzz

Shares of Snowflake SNOW, -7.45% surged 111.6% in Wednesday’s session after the company produced the largest software IPO on record, leaving the company with a market value of roughly $70 billion.

The Bank of England is expected to hold interest rates amid conflicting signals over the U.K.’s economic recovery.

Oracle’s ORCL, -1.50% bid for Chinese-owned video-sharing app TikTok has prompted concerns within the Trump administration that it still poses national security risks, according to a Bloomberg report late Wednesday.

Anglo-French biotech group Novacyt ALNOV, +3.31% swung to a profit in the first half as sales of Covid-19 tests triggered a surge in revenue.

European car sales fell 18% in August after three months of improvement post-lockdown, raising concerns over the recovery. Automakers Renault RNO, -0.95% and Volkswagen VOW, -1.39% were among the sector’s sharpest fallers on Thursday.

President Donald Trump said a COVID-19 vaccine could be rolled out from mid-October, disputing earlier comments from CDC Director Dr. Robert Redfield that a vaccine may not be available to the general public until well into next year.

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