European, Asian Stocks Fall After Jay Powell Signals Rate Hike Imminent

Stock markets fell across Europe and Asia on Thursday after Federal Reserve Chair Jay Powell signaled that the Federal Reserve would begin raising interest rates from record crisis-era lows in March.

After overnight falls on Wall Street, Europe’s regional Stoxx 600 stock index fell 0.5 percent in early trade, while its technology sub-index fell 2.3 percent.

The UK FTSE 100 was stable while Asia Pacific markets saw broad falls. Hong Kong’s Hang Seng index fell 2 percent, with highly rated tech stocks bearing the brunt of the selling. Mainland China’s CSI 300 stock index fell into a bear market, closing more than 20 percent below its recent high in February last year.

US stock futures also pointed to declines, with contracts that track Wall Street’s S&P 500 down 0.4 percent in London morning trade.

The US Federal Reserve announced on Wednesday that it will start raising interest rates at its next monetary policy meeting in March. Powell declined to exclude successive rate hikes throughout the year and said a rate hike would be “soon appropriate”. He added there is “quite some room” to tighten monetary policy without hurting the labor market.

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

“We’ve seen a fairly sizeable correction in risk appetite over the past few weeks,” he added, as traders braced for the first cycle of rate hikes since 2018.

Strategists at JPMorgan now expect the world’s most influential central bank to raise interest rates from near zero to around 0.65 percent by June and to 1.13 percent by the end of this year. As of Thursday morning, futures markets had also raised previous bets on the number of rate hikes this year from about four to about five, according to Bloomberg data.

The stock markets have shifted violently in recent weeks. The S&P 500 lost about 9 percent of its value in January, with speculative tech stocks hit particularly hard. Higher interest rates don’t just threaten corporate profits by raising the cost of borrowing. They also lower the present value of companies’ projected earnings in investors’ models, an effect amplified for companies whose peak earnings are expected years in the future.

FX markets reacted strongly to the Fed’s more hawkish tone. The dollar index, which measures the US currency against six other currencies including the euro and yen, rose 0.9 percent and was on course for its strongest week since June.

In the debt markets, the yield on the benchmark 10-year Treasury note, which moves inversely with its price, was steady at 1.85 percent on Thursday after rising overnight.

Powell warned Wednesday night that the outlook for US inflation, which hit a near 40-year high in December, had deteriorated. Prospects of persistent inflation reduce the attractiveness of fixed income securities such as government bonds.

Eurozone debt markets followed the US moves on Thursday morning. The 10-year German bund yield, which has been negative for most of 2019, was on the verge of breaking above zero again after briefly entering positive territory earlier this month.

Brent crude, the global oil marker, fell 0.3 percent to $89.65.

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