Expectations of an end to the largesse that helped drive a global equity rally for more than a year added to the already sombre mood on trading floors caused by the fast-spreading Covid Delta variant, which is forcing a re-evaluation of the economic recovery as fresh curbs are put in place.
Concerns about China’s ongoing crackdown on tech companies also continue to play on sentiment, with gaming giant Tencent warning of further moves by Beijing to tighten its grip on the sector.
After chalking up record highs on numerous occasions in recent weeks, New York’s main indexes ended in the red again Wednesday after the minutes from the Fed’s July meeting showed most board members agree on tapering monetary policy in the next few months.
The remarks come after a string of data showed the world’s top economy was well on the recovery track — particularly employment with more than 1.8 million new jobs created in June and July, and inflation running at multi-year highs.
There has been a worry on markets for some time that the blockbuster economic rebound could fan a surge in prices that could get out of control if the Fed did not act in time.
“Most participants” at the meeting “judged that it could be appropriate to start reducing the pace of asset purchases this year”, the minutes said, though they did also show some were hesitant not to knock the recovery off course by moving too early or quickly.
While there was no indication of when a move would be discussed or started, the general feeling is that it will come before January.
Oil joins sell-off
“This leaves the market reasonably well set up for a decision on the start date of tapering being made as early as next month’s meeting, to commence before the end of the year,” said National Australia Bank’s Ray Attrill, adding that it could be ratified and begun soon after the November gathering.
“Obviously, contingent on a third successive good employment report being published on 3 September.”
The main focus is now on next week’s gathering of central bankers and finance chiefs in Jackson Hole, Wyoming, where Fed boss Jerome Powell could provide some clarity on a taper timetable.
The sell-off on Wall Street filtered through to Asia.
Hong Kong fell more than two percent with Tencent adding to the pressure after warning of more moves by Beijing against tech firms, having already unveiled a series of measures in recent weeks. Tencent sank more than three percent, while rival and market heavyweight Alibaba dived more than five percent to a record low.
Tokyo and Singapore also shed more than one percent with Taipei and Jakarta off more than two percent. Seoul lost 1.9 percent and there were also retreats in Shanghai and Sydney.
Still, Wellington added almost two percent after authorities said they had achieved a breakthrough in tracing the source of a virus outbreak that plunged New Zealand into lockdown.
London, Paris and Frankfurt all lost more than one percent after opening.
Oil also tumbled after data showed a rise in US gasoline stocks indicating demand is drying up as the holiday season draws to an end, while the impact of lockdowns and the Delta variant are also dampening sentiment.
“There are still too many question marks over the crude demand outlook over the next few months and that will weigh on crude prices,” said Edward Moya of OANDA.
“The return to the office no longer seems like a certainty and delays in approving vaccines for younger children will likely mean inconsistent demand as the school year starts.”
The prospect of Fed tightening pushed the dollar higher across the board — including the yen and euro — as investors seek out better returns.
