Wall Street: Far more pain needed before ‘Fed put’ kicks in


MOSCOW • Besieged global investors swimming in a sea of red are consumed with one magic number: The strike price of the so-called Powell Put — or how much more blood stock markets need to shed before spurring the US Federal Reserve (Fed) to temper its hiking plan.

For now, a chorus of Wall Street voices said the US$2 trillion (RM8.34 trillion) tumble in US equities this month has yet to tighten financial conditions to levels that would spark a dovish monetary offset. That’s even as traders in eurodollar markets lower wagers on interest-rate increases next year.

BNP Paribas SA reckons that a 6% drop in the S&P 500 Index to 2,500 is the resistance level to spur monetary redress.

Evercore ISI has put it at least below the 2,650 mark, compared to the S&P 500 Index’s closing level at 2,656 on Wednesday.

Money managers at Black- Rock Inc and River Valley Asset Management, meanwhile, said the real economy remains relatively insulated from the stock meltdown.

“The correction that we’re seeing in the stock market obviously is something that they pay attention to,” Scott Thiel, deputy CIO for fundamental fixed income at Black- Rock in London said in an interview on Bloomberg TV. But “the bar is very high to change Fed monetary policy”.

The Fed needs something “more dramatic” than a stock rout to convince them to stray off course, Andre de Silva, global head of emerging-markets rates research at HSBC Holdings plc in Hong Kong, told Bloomberg TV yesterday.

The S&P 500 Index closed down 3.1% on Wednesday, with October on track to be the US benchmark’s worst month since February 2009.

As much as US$6.7 trillion in value has been wiped off global equity-market capitalisation since late September, according to data compiled by Bloomberg, compared to US$7.8 trillion in the February correction.

The market rout has yet to inflict much pain on corporate bonds, a key component of financial conditions monitored by central bankers. The spread of junk bonds over investment grade corporate credit has narrowed about 14 basis points this year.

Monetary officials have downplayed bouts of market volatility in 2018, citing the health of the US economic trajectory and the tight labour market.

After last month’s Fed meeting delivered an interest- rate increase, chairman Jerome Powell hinted at the prospect of a pause in the hiking plan, noted Anand Ramachandran at River Valley Asset Management.

The S&P 500 has returned about 35% since the Fed began its tightening cycle in December 2015.

“A 10% to 15% drop in equities is usually the difference between noise and signal,” BNP Paribas analysts led by Bricklin Dwyer wrote in a note.