Global stock markets came under pressure on Thursday after Wall Street suffered its worst reaction to a Federal Reserve rate rise in more than two decades on worries that the US central bank was not slowing its plan to end an era of cheap money fast enough.
The Fed forecast that fewer rate rises lie ahead than it had previously predicted when it delivered a much-anticipated final rate increase of 2018 on Wednesday.
However, investors were expecting a more soothing tone from the Fed and its chairman Jay Powell. In a press conference, Mr Powell unnerved markets by saying that he did not see the central bank changing its “autopilot” policy of reducing the size of the Fed’s balance sheet.
Asian and European equities on Thursday followed the lead of Wall Street where the S&P 500, the main US stock barometer, declined 1.5 per cent in the latest in a string a tumultuous trading sessions. It was the worst drop following a Federal Reserve increase since 1994.
The pan-European Stoxx 600 index dropped 1.1 per cent, after earlier hitting its lowest level since November 2016. Germany’s DAX shed 1.1 per cent, France’s CAC 40 fell 1.5 per cent, while in London, the FTSE 100 dropped 0.8 per cent.
In Asia, Japan’s Topix index closed down 2.5 per cent. MSCI’s pan-Asian index of stocks outside of Japan fell 1.2 per cent.
The more dovish forecast by the Fed “wasn’t enough for stocks,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“The Fed has not jumped on the slowdown bandwagon,” he said, referring to expectations among some investors and economists that concerns about a slowing global economy and a pullback in the US stock market might prompt the Fed to trim its plans further for rate increases next year.
The Fed has led the global charge in tightening interest rates, having boosted its main rate nine times since the cycle began in March 2015. With the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, sitting just below its two per cent target, some analysts have questioned whether the Fed is moving too aggressively amid rising global risks.
In what some strategists see as a sign of rising angst, the difference in short-and-medium term Treasury yields — known as the yield curve — has narrowed dramatically in recent months. In early London trading on Thursday, it stood as low as 9.3 basis points, near the lowest level since 2007.
“The Fed’s decision to push ahead with its fourth hike of 2018, but shave 25 basis points off its profile for expected hikes, has seen the US 2-10 year Treasury curve flatten further and risk assets suffer,” said Chris Turner, strategist at ING. “The dominant reaction in financial markets has been one of caution.”
Elsewhere in the fixed income market, German Bund yields, seen as a key European haven asset, slipped 2 basis points to 0.225 per cent. Bond yields fall when prices rise.
The US dollar slipped 0.3 per cent, with the euro, UK pound and Japanese yen all climbing.
In Europe, Sweden’s Riksbank surprised many economists by raising its main interest rate to minus 0.25 per cent from 0.5 per cent. The move sent the country’s currency, the krona, rallying sharply against the euro.
Meanwhile, the Bank of England is broadly forecast to keep rates on hold amid uncertainty over the outcome of Brexit negotiations. That decision is due at midday in London.