Bonds surged with the yen as the Federal Reserve’s caution regarding the global economic outlook rippled through markets.
European stocks fell with commodities as Fed Chair Janet Yellen cited concern over slowing growth in China and turbulence in global markets for keeping interest rates unchanged on Thursday. German 10-year bund yields tumbled the most since July as the decision spurred speculation that the euro region’s central bank could boost stimulus. Emerging markets rallied on prospects for keeping rates lower for longer.
While Yellen said most policy makers still expect a rate increase this year, traders of fed fund futures pushed their bets to next year. For the third straight quarter Fed officials lowered projections for the funds rate in coming years, saying in a statement that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
“Yellen kept referring to the strong dollar and turmoil offshore, those were the main issues,” Mark Lister, head of private wealth research at Craigs Investment Partners Ltd. in Wellington, which manages about $7.2 billion, said by phone. “They probably have taken a little bit more notice of what’s happening overseas, in China and emerging markets, than some people might have expected. Every meeting is going to be considered live from now on.”
Futures traders are pricing in a 17 percent probability the central bank increases it target range in October, a 44 percent chance by the December meeting and a 52 percent likelihood by January.
Bonds gained from Australia to Germany, while Treasuries held an advance from Thursday. The yield on 10-year German bunds, the euro region’s benchmark sovereign securities, dropped nine basis points to 0.69 percent at 10:10 a.m. in London, set for its biggest decline since July 7. Rates on similar-maturity Italian bonds fell seven basis points to 1.83 percent, while those on Spain’s declined seven basis points to 2.02 percent.
“The implication for Europe is that the ECB may need to ease policy further,” said Steven Major, global head of fixed-income research at HSBC in London. “If it’s true there is a competitive devaluation going on, then what the Fed did tonight doesn’t help the ECB. This will take pressure off risky assets. I will be in favor of those. Peripherals are likely to do well.”
The yield on U.S. 10-year Treasuries fell one basis point to 2.18 percent on Friday, after falling 10 basis points the previous day. The rate on Australian notes due in a decade slid nine basis points to 2.78 percent, and neighboring New Zealand’s benchmark yield fell five basis points.
The yen rose 0.8 percent to 119.11 per dollar. The era of a weaker yen is coming to an end and Japan’s currency may strengthen toward 115 per dollar, according to Eisuke Sakakibara, a former vice finance minister. The dollar dropped against 14 of its 16 major peers on Friday, heading for weekly declines against the euro and the yen.
The dollar was at $1.1450 per euro on Friday, after tumbling 1.3 percent to $1.1435 the previous day. It has declined 1 percent against Europe’s common currency this week. The Bloomberg Dollar Spot Index dropped to its lowest level since Aug. 24.
Currencies from Australia, New Zealand and Canada were among the best performers as investors were drawn to currencies with higher yields.
The Aussie was also boosted after the Reserve Bank of Australia Governor Glenn Stevens said he was “pretty content” with the level of interest rates and the economy appears to be coping with a drop in mining investment.
Automakers and banks led declines in Europe, with the Stoxx Europe 600 Index dropping 1.1 percent and trimming a second weekly advance to 0.4 percent. The volume of shares changing hands was 26 percent greater than the 30-day average.
E-mini futures on the Standard & Poor’s 500 Index expiring in December added 0.1 percent after the gauge fluctuated between gains of 1.3 percent and losses of 0.4 percent yesterday. The measure has risen 1.5 percent this week, heading for its first back-to-back weekly increases since June. U.S. stocks erased gains after Yellen indicated that global developments overshadowed signs of strength in America. The expiration of some futures and options on stocks and indexes, known as quadruple witching, may add to market volatility today.
The MSCI Emerging Markets Index added 0.7 percent, taking this week’s advance to 3.8 percent, the most since April. India’s Sensex climbed 1.4 percent and South Korea’s Kospi gained 1 percent.
The Hang Seng China Enterprises Index increased 0.4 percent amid data showing property prices rising in more Chinese cities during August, extending this week’s gain to 3 percent. The Shanghai Composite Index closed 0.4 percent higher, capping a weekly drop of about 3.2 percent.
India’s rupee jumped 1 percent and South Africa’s rand climbed 1.4 percent, lifting a gauge of 20 currencies up 0.4 percent.
Industrial metals declined after the Fed decision renewed concerns about the strength of the global economy. Copper dropped 0.5 percent to $5,361.50 a metric ton, while nickel fell 0.9 percent. Gold, while little changed at $1,131 an ounce Friday, was poised for its first weekly gain in four.
Oil headed for a weekly increase after data showed an unexpected decline in U.S. crude stockpiles. West Texas Intermediate crude was 25 cents lower at $46.64 a barrel, paring a weekly gain of 4.5 percent. Brent crude advanced 18 cents to $49.26.