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European and Asian shares fall after Jay Powell signals early rate hike

Stock markets plummeted across Europe and Asia after Federal Reserve Chairman Jay Powell signaled that the US central bank would start raising interest rates from crisis-era lows. panic in March.

After an overnight drop on Wall Street, Europe’s regional Stoxx 600 share index opened 1.3% lower. The UK’s FTSE 100 fell 1% while Asia Pacific markets also saw broad-based declines. Hong Kong’s Hang Seng Index fell 2.1%, with appreciated technology stocks bearing the brunt of the selling in Europe and Asia.

That sentiment has been reflected across the Atlantic, with US stocks set to continue to fall as futures on the benchmark S&P 500 index fell 0.9%.

The US central bank said on Wednesday that it will begin raising interest rates at its next policy meeting in March. Chairman Jay Powell refuse to exclude consecutive interest rate hikes at the end of the year, said that a rate hike would be “appropriate soon” and added there was “sizable room” to tighten monetary policy without harming the labor market. .

“Global markets are now more sensitive to the direction of central bank policy than to the latest news on [corporate] earnings, macroeconomic data or coronavirus,” said Valentijn van Nieuwenhuijzen, Investment Director at NN Investment Partners.

“We have seen a sizable correction in risk appetite in recent weeks,” he added, as traders brace for the first rate hike cycle since 2018.

JPMorgan strategists now expect the world’s most influential central bank to raise key funds rates from near zero to around 0.65% in June and 1.13% later this year. On Thursday morning, the futures markets also raised their previous bets on the number of rate hikes this year from about four to about five, according to Bloomberg data.

Column chart of Overnight Index Swap Cumulative Tightening by Meeting (bps) shows a more hawkish Federal Reserve Market Price

The stock market has changed wildly in recent weeks. The S&P 500 Index lost about 9% of its value in January, with speculative tech stocks hit particularly hard. Higher interest rates don’t just threaten a business’s bottom line by increasing borrowing costs. They also lower the present value of firms’ forecasted earnings in the investor’s model, whereby this effect is increased for the top-earning firms not expected until future years.

In the debt markets on Thursday, the yield on the benchmark 10-year Treasury note, which fluctuates inversely with its price, fell 0.01 percentage points to 1.83 percent after an overnight climb. Powell warned on Wednesday night that the outlook for US inflation, which hit a nearly 40-year high in the year to December, had soured. A prolonged inflation outlook reduces the appeal of fixed-income securities such as government bonds.

Increased uncertainty about tension between Russia and Ukraine have also contributed to a rise in oil prices, which hovered near multi-year highs on Wednesday.

Brent crude, the global oil index, fell 0.4 percent to $89.6.

Unhedged – Markets, Finance and Strong Perspectives

Robert Armstrong analyzes the most important market trends and discusses how Wall Street’s best minds respond to them. Registration here to receive newsletters delivered straight to your inbox every day of the week

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