Fed feeds recession fears, Japan jumps in to support yen

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By Marc Jones

LONDON (Reuters) - World stocks were close to a two-year low and Japan was forced to unilaterally intervene in FX markets for the first time since 1998 on Thursday, after the Federal Reserve's aggressive U.S. rate hike signals had put markets on the run.

In Europe, where all the economic pain and volatility has been amplified this week by Russia's threat to use nuclear weapons, major stocks markets tumbled by more than 1% before finding some support.

It had been a rollercoaster from the off. Tokyo swooped in to support the yen not long after Europe opened. While the move seemed to have been coming for weeks - the yen has fallen 20% this year almost half of that in the last six weeks - it still packed a punch.

Traders watched the Japanese currency surge to 142.39 from 145.81 to the dollar in the space of a few minutes and make it as far as 140 to the greenback before running out of gas. [/FRX]

With the dollar suddenly stalled, the euro lifted nearly 0.5% off a 20-year low. Sterling, which is not far behind the yen having lost over 8% since August, was hoisted from a 1985 trough too as the Bank of England raised its rates by another 50 basis points.[/FRX]

"We have taken decisive action (in the exchange market)," Japan's vice finance minister for international affairs Masato Kanda told reporters following the interventions.

The move had came just hours after the BOJ had maintained super-low interest rates, fighting the global tide of monetary tightening by the Fed and others trying to rein in inflation.

Asian stocks had swooned to a two-year low overnight after the Fed's rate hike and GDP forecast cuts had triggered a brutal finish on Wall Street, although S&P futures pointed to a modest rebound later. [.N]

"Fed is delivering exactly what it said it would (with rate hikes) but the markets have pushed out the path of interest rates quite a lot," Close Brothers Asset Management Chief Investment Officer Robert Alster said.

"All of a sudden we are entering a scenario where everything gets a lot more drawn out... It is a bit disconcerting in some respects but at least they have laid out the road map and we know the economy is second to monetary policy.

Wall Street was expected to tick up when it reopens but the benchmark S&P 500 is now less than 4% away from its mid-June low, its weakest point of the year. [.N]

In the rates market, short-term yields remain on the rise and the peak for the benchmark Fed funds rate a moving target.

The median of Fed officials' own outlook has U.S. rates at 4.4% by year's end -- 100 bps higher than their June projection -- and even higher, at 4.6%, by the end of 2023.

Futures have scrambled to catch up. The yield on two-year Treasuries hit a 15-year high of 4.13% in Asia before dipping back to 4.10% in Europe.

Ten-year yields are below that, at 3.54% as traders price in the hikes' damage to longer-run growth. In Europe, Germany's rate sensitive 2-year bond yield rose as far as to 1.897% - its highest since May 2011.

"No one knows whether this process will lead to a recession or if so how significant that recession would be," Fed Chair Jerome Powell told reporters after the rate hike announcement.

"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer."

GRAPHIC: Yen sees historic drop https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwddjapo/Pasted%20image%201663838463801.png

FOLLOW THE FED

The Swiss National Bank also pulled up its rates by a chunky 0.75 percentage point - only the second increase in 15 years which also ended its 7-1/2 year spell in negative interest rates.

Previously Swiss rates had been frozen at minus 0.75% as the SNB tried to tame the appreciation of the Swiss franc but Thursday's message was the reverse, that more hikes as well a FX intervention might be needed in the current environment.

"To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary," it added, sending the franc up over 1%.

The global outlook is helping drive the dollar higher as U.S. yields look attractive and investors think other economies look too fragile to sustain rates as high as those contemplated in the U.S.

Japan and China are the outliers and their currencies are sliding particularly hard -- the yen had fallen to the weaker side of 145 per dollar on Thursday before Tokyo's intervention after the Bank of Japan had stuck with its ultra-easy monetary policy.

Yields in Japan's government bond market also retreated as speculators closed some bets on imminent policy changes. [JP/]

Back in Europe, Norway and Britain raised their rates by 50 bps with traders seeing plenty more coming too.

Not that that is much salve for the region's currencies.

The pound's modest rise on the day came after it had hit a 37-year low of $1.1213 overnight on the growing worries about the state of Britain's finances. Sweden's crown had also hit a record low despite the country's steepest rate hike in a generation earlier this week.

The dollar's rise has also sent emerging market currencies tumbling and punished cryptocurrencies and commodities.

Lira traders were left wincing again as Turkey, where inflation is now running at around 85%, defied economic orthodoxy and slashed another 100 basis points off its interest rates.

Spot gold was down 0.3% near a two-year low at $1,668 an ounce. Bitcoin was just above $19,000 and Brent crude steadied at $90.33 a barrel after sliding on demand worries.

"The more hawkish the Fed gets, the more market volatility is likely to be elevated, and the risk of a recession ticks higher," said Gautam Khanna, Head of U.S. Multi Sector Fixed Income at Insight Investment.