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European and Asian shares drop after Jay Powell signals rate rises soon

Stock markets fell across Europe and Asia on Thursday after Federal Reserve chair Jay Powell signalled that the US central bank would begin boosting interest rates from crisis-era record lows in March.

Following overnight declines on Wall Street, Europe’s regional Stoxx 600 share index fell 0.5 per cent in early dealings, with its technology sub-index falling 2.3 per cent.

The UK’s FTSE 100 was steady, while there were broad declines across Asia Pacific markets. Hong Kong’s Hang Seng index fell 2 per cent, with highly valued technology stocks bearing the brunt of the selling. Mainland China’s CSI 300 share index dropped into a bear market, closing more than 20 per cent below its most recent high of February last year.

US equity futures also pointed to declines, with contracts that wager on the direction of Wall Street’s S&P 500 gauge 0.4 per cent lower in London morning dealings.

The US central bank indicated on Wednesday it would begin raising interest rates at its next policy meeting in March. Powell declined to rule out consecutive rate increases later in the year, and said a rate rise would “soon be appropriate”. He added there was “quite a bit of room” to tighten monetary policy without harming the labour market.

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

“We’ve seen a quite sizeable correction in risk appetite in recent weeks,” he added, as traders prepared for the first rate rise cycle since 2018.

JPMorgan strategists now expect the world’s most influential central bank to raise its main funds rate from close to zero to about 0.65 per cent by June and 1.13 per cent by the end of this year. On Thursday morning, futures markets had also raised previous bets of the number of rate rises this year from about four to about five, according to Bloomberg data.

Column chart of Cumulative tightening priced into overnight index swaps by meeting (bps) showing Markets price in a more hawkish Federal Reserve

Equity markets have shifted violently in recent weeks. The S&P 500 has lost about 9 per cent of its value in January, with speculative tech stocks hit particularly hard. Higher interest rates not only threaten corporate profits by raising borrowing costs. They also lower the present value of companies’ forecast earnings in investors’ models, in an effect that is magnified for businesses whose peak earnings are not expected until years into the future.

Currency markets reacted strongly to the Fed’s more hawkish tone. The dollar index, which measures the US currency against six others including the euro and the yen, rose 0.9 per cent and was on track for its strongest week since June.

In debt markets on Thursday, the yield on the benchmark 10-year Treasury note, which moves inversely to its price, was steady at 1.85 per cent after a steep climb overnight.

Powell cautioned on Wednesday evening that the outlook for US inflation, which hit a near 40-year high in the year to December, had worsened. Prospects of sustained inflation reduce the appeal of fixed income paying securities such as government bonds.

Eurozone debt markets followed US moves on Thursday morning. The yield on Germany’s 10-year Bund, which has been mostly negative since 2019, was again on the cusp of heading above zero after briefly entering positive territory earlier this month.

Brent crude, the global oil marker, dipped 0.3 per cent to $89.65.

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