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

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

Following overnight declines on Wall Street, Europe’s regional Stoxx 600 share index opened 1.3 per cent lower. The UK’s FTSE 100 fell 1 per cent while there were also broad declines across Asia Pacific markets. Hong Kong’s Hang Seng index fell 2.1 per cent, with highly valued technology stocks bearing the brunt of the selling in Europe and Asia.

That sentiment was reflected across the Atlantic, with US equities pointing to further declines as futures for the benchmark S&P 500 fell 0.9 per cent.

The US central bank indicated on Wednesday it would begin raising interest rates at its next policy meeting in March. Chair Jay Powell declined to rule out consecutive rate increases later in the year, said a rate rise would “soon be appropriate” and 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.

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.

In debt markets on Thursday, the yield on the benchmark 10-year Treasury note, which moves inversely to its price, dipped 0.01 percentage point to 1.83 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.

Increasing uncertainty over tensions between Russia and Ukraine had also contributed to a rise in oil prices, which hovered near multiyear highs on Wednesday.

Brent crude, the global oil marker, dipped 0.4 per cent to $89.6.