Stock markets were deep in the red and some key government bond yields climbed to their highest in years on Thursday after the Federal Reserve signalled the possibility of faster-than-expected U.S. rate hikes and stimulus withdrawal.
Both Asia and Europe’s bourses fell heavily after Wall Street’s tech-heavy Nasdaq plunged more than 3% on Wednesday and 2- and 5-year Treasury yields, important drivers of global borrowing costs, surged to post-COVID pandemic highs.
Minutes from the Fed’s December meeting had shown that a tight jobs market and unrelenting inflation could require the U.S. central bank to raise rates sooner than expected and begin reducing its overall asset holdings – a process known as quantitative tightening (QT).
Early European trading saw the STOXX 600 share index (.STOXX) lose 1.3%, erasing all of its gains for the year that had sent it to record highs.
Asia has seen sharp falls too . Australian shares (.AXJO) slid 2.7% in their biggest daily percentage drop since early September 2020, and Japan’s Nikkei (.N225) fell 2.9%, its biggest daily fall since June.
“Some people are quite spooked by the minutes from the Fed that they could be tightening faster,” said Carlos de Sousa, an emerging markets strategist and portfolio manager at Vontobel Asset Management.
“Maybe the market is overreacting a bit, though. The fact they are discussing this (quantitative tightening) doesn’t mean they are going to do it,” he said, adding that he expected 1-3 rate hikes in 2022 but would be surprised if QT did happen this year.
The minutes showed that Fed officials were uniformly concerned about the pace of inflation, which promised to persist, alongside global supply bottlenecks, “well into” 2022.
The Nasdaq’s (.IXIC) 3% drop on Wednesday was its biggest one-day percentage decline since last February and the S&P 500 (.SPX) fell the most since Nov. 26, when news of the Omicron variant first hit global markets.
“There is a risk that the Fed might fall into the trap of making policy errors because they do have to perhaps hike interest rates faster than expected, but given the timing of their exit from quantitative easing, it could coincide with a slowdown in the economic cycle and also a decline in inflation on base effects,” said Casanova.
European trading saw U.S. Treasury yields continue to push higher across the curve. The U.S. 10-year yield hit its highest level since April 2021 on Thursday above 1.73% and was last at 1.732%, from a close of 1.703% on Wednesday.
The policy-sensitive U.S. 2-year yield hit a new 22-month top of 0.863% while the 5-year yield hit highs last seen in February 2020 at 1.459%.
In Europe too, 10-year Germany Bund yields, which rolled over into a new benchmark, rose to -0.05% , the highest level since May 2019, Refinitiv data showed.
Analysts said that while the rollover into a new contract made the move in Bund yields appear large, even if measured on a continuous basis, yields were at new multi-month highs.
Higher U.S. yields continued to support a firm dollar , though the currency gave back some ground against the yen after touching five-year highs earlier this week, falling 0.21% to 115.86.
The euro weakened 0.05% to $1.1307 while the dollar index crept up by the same margin to 96.228.
In commodity markets, global benchmark Brent crude steadied at $79.14 per barrel and U.S. crude dipped to $80.08 a barrel after OPEC+ producers agreed to boost production and on a surge in U.S. stockpiles.
Spot gold was down 0.8% at $1,794 per ounce, with higher U.S. bond yields dulling the lustre of the precious metal.