European stocks follow Wall Street higher after Fed rate hike

European stocks followed Wall Street higher after the US Federal Reserve announced its first 0.5 percentage point interest rate hike in more than 20 years, but signaled it would refrain from increase even more.

The regional Stoxx 600 stock index gained 1.2% on Thursday after the widely expected U.S. central bank rate hike sparked a rally in stocks as Fed Chairman Jay Powell appeared to rule out increases by 0.75 percentage point in future meetings.

Germany’s Xetra Dax rose 1.6%, while London’s FTSE 100 gained 1.3%.

Wall Street’s benchmark S&P 500 closed 3% higher on Wednesday, its biggest one-day gain since May 2020, while the tech-heavy Nasdaq Composite was up 3.2% .

“Investors came to the meeting worried that the committee was being too aggressive in tightening monetary policy,” said Clara Cheong, global markets strategist at JPMorgan Asset Management.

US government bonds, however, remained volatile as fixed income traders focused on Powell’s comments signaling the future path of rate hikes and inflation remained uncertain.

The yield on the benchmark 10-year US Treasury rose 0.03 percentage points to 2.94%, after climbing on the eve of the Fed’s announcement before falling. Bond yields move inversely to prices.

On Wednesday, Powell said a neutral monetary policy stance, which neither speeds up nor slows down the economy, was “not something we can pinpoint with any precision.”

The Fed chair “seemed very determined to raise rates until he saw some progress on inflation,” said Rose Ouahba, head of fixed income at Carmignac. “And didn’t give any idea where the Fed should stop.”

The annual pace of consumer price increases in the United States reached 8.5% in March.

In currencies, the pound fell 1.5% against the dollar to just over $1.24 and 1% against the euro to below €1.18, after the Bank of England said that the UK economy could slip into recession later this year.

Britain’s currency had weakened against its major peers ahead of a Bank of England interest rate decision, falling further after the central bank raised its main borrowing rate by a quarter of a quarter on Thursday. point to 1%, marking its fourth consecutive increase. The BoE also forecast that the annual inflation rate would peak at 10%.

“It’s really the sum of all our fears” about the UK economy, said Roger Lee, head of UK equity strategy at Investec. “Growth forecasts have been revised downwards, inflation expectations have been raised and interest rates continue to rise.”

However, UK gilt markets hinted that traders believed the BoE should become more dovish in the near future. The yield on the two-year gilt, which tracks monetary policy expectations, fell 0.14% as the price of debt rose significantly.

The yield on the UK 10-year gilt fell 0.1 percentage point to 1.87% as traders bought the asset.

Futures markets reported that Wall Street’s S&P 500 stock index would shed 0.7% in early trading in New York and the tech-heavy Nasdaq 100 would fall 0.9%.

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