Global stock markets dipped, European government bonds dropped and the dollar strengthened sharply after US central bank officials brought forward the anticipated timing of the Federal Reserve’s first post-pandemic interest rate rise.
The FTSE All-World index of developed and emerging market stocks, which hit a closing record on Monday, headed for its third session of losses on Thursday, falling 0.6 per cent.
The Federal Reserve said on Wednesday that most of its officials expected a rate rise in 2023, against earlier predictions of 2024, as the US economy recovered strongly from the pandemic and consumer price inflation hit an annual rate of 5 per cent in May.
Fed chair Jay Powell also said the world’s most influential central bank was “talking about talking about” reducing the Fed’s $120bn-a-month asset-buying programme that has boosted financial markets since March last year.
The announcement rattled the US Treasury market on Wednesday, as the prospect of higher interest rates on cash lowered expected returns from fixed interest securities such as bonds, with traders in Europe following those moves in the next session.
“It was a hawkish surprise,” said Keith Balmer, multi-asset portfolio manager at BMO Global Asset Management. “Markets now see the Fed as stepping in to control inflation earlier than expected,” he added, following previous comments from Powell that suggested price rises above the central bank’s long-term 2 per cent target would be temporary.
The dollar index, which measures the greenback against trading partners’ currencies, jumped 0.7 per cent after gaining a similar amount on Wednesday as traders anticipated higher returns from holding the world’s reserve currency. The euro lost 0.5 per cent against the dollar to $1.193.
The yield on the benchmark 10-year Treasury note, which jumped 0.09 per cent on Wednesday evening to 1.58 per cent following the decision from the US central bank, moderated slightly in European trading hours to 1.558 per cent.
European bond yields, which move inversely to prices, raced higher as traders bet on other central banks following the Fed to rein in their crisis-era stimulus spending. The UK’s 10-year gilt yield rose 0.09 percentage points to 0.828 per cent. Germany’s equivalent Bund yield added 0.04 percentage points to minus 0.164 per cent.
Stock markets were less affected by the rate increase forecast as investors focused on the strength of the post-pandemic economic recovery and bought up shares in businesses expected to benefit from higher borrowing costs.
The Stoxx Europe 600 index, which rallied to an all-time high on Wednesday, fell 0.3 per cent on Thursday. Shares in European banks, which benefit from higher interest rates that enable lenders to make wider profit margins, gained 1.2 per cent.
The next US rate rise “will be happening at a time when the [global] economy is able to stand on its feet”, said Zehrid Osmani, manager of Martin Currie’s global portfolio trust.
Futures markets signalled the S&P 500 index would slip just 0.2 per cent at the New York opening bell after declining 0.5 per cent on Wednesday, while the top 100 stocks on the technology-focused Nasdaq Composite would lose 0.3 per cent.
Elsewhere in markets, the Norwegian krona rose 0.1 per cent against the euro to €0.984 despite the Norges Bank saying it was likely to raise interest rates in September. Some traders had expected an increase on Thursday.
Brent crude, the international oil benchmark, rose 0.1 per cent to $74.48 a barrel.