It has been a volatile day for equity markets. The DAX index dropped sharply in Thursday’s Asian session, but has recovered somewhat in European trade. Currently, the DAX is at 10,664, down 0.94% on the day. In economic news, the eurozone current account surplus widened to EUR 23.0 billion, up from EUR 17.0 billion in the previous release. This beat the estimate of EUR 18.4 billion. In the U.S., the Philly Fed Manufacturing Index is expected to rise to 15.1, while jobless claims are forecast to increase to 216 thousand. On Friday, Germany and the eurozone release consumer confidence reports.
Equity markets have shown plenty of volatility in December, and the Federal Reserve rate statement has shaken up the markets on Thursday. Investors had expected a rate hike, which the Fed delivered. However, there was hope for a dovish rate statement, given that the markets have been in turmoil for weeks and the U.S. economy appears to be cooling down. Instead, policymakers maintained plans to continue raising rates. Most significantly, policymakers did not remove the critical phrase “further gradual increases” from their statement. At the same time, the dot plot forecast was lowered for 2019, from three rate rises to two.
Just a few months ago, the markets were predicting a “rate hike every quarter” for 2019, but the Fed has made a U-turn in monetary policy, as policymakers respond to economic data which is pointing to slower growth. The policy of gradual rate hikes bears much of the responsibility for the volatility in the markets, and the message from the Fed that more hikes are coming will likely mean that the volatility will continue in December and into the New Year.
EU policymakers have plenty of headaches to deal with, but there was some positive news on the domestic front on Wednesday, as Italy and the EU announced on Wednesday that an agreement had been reached whereby Italy would lower its deficit target to 2.04%, down from its original target of 2.4%. For weeks, Italy and the EU had appeared to be on a collision course over the budget, with the EU threatening unprecedented sanctions against the Italian government. The deal sent Italian stocks higher on Wednesday and has improved investor risk appetite.
