Global shares fell and government debt yields rose on Thursday as investors spooked a wave of interest rate hikes by central banks that threatened to come more in the fight to tame inflation.
The benchmark S&P 500 fell 2.4% on Thursday, and the tech-heavy Nasdaq Composite lost 3.1%. In Europe, the broad Stoxx 600 fell 2.9 percent after hawkish interest rate warnings from central banks in the US, UK, Europe and Switzerland over the past day.
The US Federal Reserve, the European Central Bank and the Bank of England slowed the pace of rate hikes, opting for a 0.5 percentage point increase. But investors were rattled in particular by the ECB’s comments that “inflation remains too high” and that interest rates would continue to rise by 0.5 percentage points “for some time”.
The yield on Germany’s 10-year government bond rose 0.15 percentage point to 2.09%, while the two-year bond yield rose 0.26 percentage point to 2.39% — near its highest level since 2008 since then. The yield on 10-year Italian bonds added 0.32 percentage points to 4.18 percent. Yields rise when bond prices fall.
The euro was trading 0.7% lower against the dollar at $1.06 by late afternoon London time, erasing earlier gains.
The cuts came after the Federal Reserve ended a streak of four consecutive 0.75 percentage point hikes, bringing the federal funds rate to a target range of between 4.25% and 4.5%. However, Fed Chairman Jay Powell said: “Significantly more evidence will be needed to give confidence that inflation is on a sustained downward path.”
The combination of the Fed’s gloomy outlook and a slowdown in interest rate hikes has left some disappointed. “Either you think your policy position is ‘not restrictive enough’ or you believe it is close enough to [0.25 percentage point] an increase is on the table for February,” said Steve Blitz, chief U.S. economist at TS Lombard. “You can’t believe both.”
Seema Shah, chief global strategist at Principal Asset Management, said the market “still doesn’t seem to buy into the idea that the Fed won’t cut rates until 2023 — there’s something to that [Powell’s] messages that do not quite resonate”.
Sentiment was further dented by weak economic data, fueling fears of an impending recession. The U.S. Commerce Department reported a 0.6 percent month-on-month drop in retail sales in November, the biggest drop in 11 months. The drop was more than the 0.1 percent decline forecast by economists polled by Reuters. US industrial production fell 0.2% in November.
The two sets of data show that the U.S. economy “has lost serious momentum, with consumer resistance to much higher interest rates beginning to erode,” said Andrew Hunter, senior U.S. economist at Capital Economics.
The FTSE 100 fell 0.9 percent even though the BoE raised its interest rate to 3.5 percent while warning that further rate hikes were likely. Sterling fell 1.4% against the dollar to $1.22, down from a six-month high.
Gilts gained broadly, with the UK two-year bond yield down 0.09 percentage point to 3.36% as the price of the debt instrument edged higher. The yield on the 10-year note also fell 0.09 percentage points to 3.24 percent.
Asian markets followed the slide in US stocks, with Hong Kong’s Hang Seng index down 1.6%, while Japan’s Topix lost 0.2% and China’s CSI 300 traded flat.
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