Asian shares seen falling on ‘hawkish’ Fed outlook

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SYDNEY (Reuters) – Asian shares were set to open significantly lower on Thursday as the U.S. Federal Reserve poured cold water on market expectations of a lengthy easing cycle after delivering a 25-basis-point cut.

FILE PHOTO: An investor walks past a screen displaying stock information at a brokerage house in Shanghai, China May 6, 2019. REUTERS/Aly Song

Fed Chair Jerome Powell, speaking in a news conference after the release of the central bank’s statement, characterized Wednesday’s rate cut as “a mid-cycle adjustment to policy”, a sign to markets that sharp further cuts were not imminent.

Later in a press conference, Powell said Wednesday’s easing was “not the beginning of a long series of rate cuts”, sending U.S. equity markets into a tailspin and dollar to its highest since May 2017 against a basket of six major currencies.

Overnight, the Dow .DJI and the Nasdaq .IXIC lost 1.2% each while the S&P 500 .SPX declined 1.1%. MSCI’s gauge of stocks across the globe .MIWD00000PUS slipped to a five-week low.

In a sign the gloomy mood is likely to spread to Asia, Nikkei futures NKc1 faltered 0.3% while futures for Australia’s benchmark share index YAPcm1 fell 0.4%. E-minis for the S&P500 ESc1 were off 0.3%.

“By not coming out and promising more cuts in the future, the market appears to have interpreted this policy move as hawkish,” said John Velis, forex and macro strategist at BNY Mellon.

Graphic: Asian stock markets – tmsnrt.rs/2zpUAr4

U.S. Treasuries reacted by flattening the yield curve as the front-end of the market US2YT=RR scaled back on prior expectations for at least a 100 basis points of easing in the near-term.

Notably, yields on 10-year bonds US10YT=RR too came under pressure, suggesting “the market thinks the Fed is making a policy mistake by not being more dovish,” National Australia Bank analysts wrote in a note.

In foreign exchange, the dollar rose against the euro and Antipodean currencies on expectations monetary policies in Europe, Australia and New Zealand will remain accommodative.

The dollar index .DXY finished July 2.5% higher though the greenback’s reaction against the Japanese yen JPY= was a bit muted at 108.77

The common currency EUR= hit a more than two-year trough of $1.1065 overnight and was last at $1.1073.

The Aussie AUD=D3 fell to $0.6832, its lowest since early January when a currency “flash crash” briefly took it to $0.6715 while the kiwi NZD=D3 held at $0.6561 as markets wager on a rate cut by the Reserve Bank of New Zealand next week.

In commodities, crude oil futures settled higher on Wednesday for the fifth straight day, buoyed by a bigger-than-expected drop in U.S. inventories, but the stronger dollar helped bring prices down from session highs in post settlement trading.

U.S. crude futures CLc1 were off 68 U.S. cents at $57.9. Brent had settled up 0.7% at $65.17.

Spot gold XAU= bounced from a two-week trough to add 0.1% to $1,414.46 an ounce.

Editing by Sam Holmes