Markets plunge as monetary policy tightens in US, Europe and Asia

NEW YORK

U.S. markets appear to be heading for a sharp lower open on Thursday, a day after the Federal Reserve raised its key interest rate by three-quarters of a point and signaled that further rate hikes were coming to fight inflation.

European central banks are following suit, including a surprise rate hike on Thursday in Switzerland, a country that has left interest rates unchanged for years.

Dow Jones Industrials futures fell 1.7% and S&P 500 futures slipped 2.1%.

European benchmarks and most Asian markets also fell, as did the price of oil.

Stocks in New York rallied on Wednesday afternoon after the Fed’s biggest hike since 1994, as investors were initially buoyed by comments from Chairman Jerome Powell suggesting that future rate hikes could be more modest.

But economists have warned the gains could be short-lived given the extent to which high inflation has seeped into the global economy.

The Bank of England raised its key rate on Thursday, but only by a quarter point, warding off pressure for a bolder move to tackle price hikes that have pushed inflation to a 40-year high.

This is the fifth quarter-point hike by the UK Central Bank since December, which took its key rate to 1.25%.

The Swiss National Bank raised rates by a surprisingly strong half a percentage point to a still-low minus 0.25%. Taiwan’s central bank raised its key rate by 0.125 basis points to 1.5%.

“The clear reading here is that the FOMC (Fed) has released the central bank Hawkish Genie from the bottle, and we should expect more aggressive follow-through from other central banks except those in economic difficulty,” Stephen Innes of SPI Asset management said in a comment.

The French CAC 40 fell by 2%, the German DAX by 2.7% and the British FTSE 100 by 2.3%.

In Asian trading, Japan’s benchmark Nikkei 225 added 0.4% to end at 26,431.20. Australia’s S&P/ASX 200 gave up earlier gains, falling nearly 0.2% to 6,591.10. The South Korean Kospi edged up 0.2% to 2,451.41. Hong Kong’s Hang Seng fell 2.2% to 20,845.43, while the Shanghai Composite fell 0.6% to 3,285.38.

The Bank of Japan has started a two-day policy meeting that will end on Friday. Japan’s central bank is under pressure to act given downward pressure on the yen from rate hikes in the US and ultra-low rates in Japan. But its aim has been to foster sustainable inflation after years of fighting deflation or falling prices.

Investors sell yen and buy dollars in anticipation of higher returns on dollar-denominated holdings. Japanese politicians and the head of the central bank have expressed concerns about the decline in the yen, but no drastic policy change is expected.

The US dollar slipped to 132.80 Japanese yen from 133.82 yen. It recently surpassed 135 yen, the highest level in 20 years. The euro traded at $1.0394, down from $1.0447.

All manner of investments, from bonds to bitcoin, have fallen this year as high inflation forces central banks to try to rein in inflation that has erupted as economies recover from pandemic disruptions. The war in Ukraine has added to these price pressures.

Powell said on Wednesday the Fed was moving “quickly” to bring rates closer to normal levels after last week’s stunning report showed consumer inflation unexpectedly accelerated last month, wiping out stocks. hopes that inflation has already peaked.

However, Powell also hinted that rate increases later this year could be lower. That appeared to allay fears that the central bank might overshoot its target of cooling inflation and tip the economy into a slowdown.

The Fed is “not trying to cause a recession now, let’s be clear about that,” Powell said. He called Wednesday’s surge “front-loading.”

Even without a recession, higher interest rates hurt investment prices. The hardest hit were those that soared the most in the easy money era of ultra-low interest rates, including high-growth tech stocks and cryptocurrencies.

The war in Ukraine has helped push up oil prices as the region is a major energy producer.

In energy trading, benchmark U.S. crude fell $1.59 to $113.72 a barrel in electronic trading on the New York Mercantile Exchange. It lost $3.62 on Wednesday to $115.31 a barrel. Brent, the international standard, fell $1.73 to $116.78 a barrel.