Tuesday, April 16, 2024

European Markets Slide as Central Banks Weigh Interest Rate Hikes

HomeStock-MarketEuropean Markets Slide as Central Banks Weigh Interest Rate Hikes

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European markets opened lower on Thursday ahead of expected interest rate hikes by several central banks, including the Bank of England. Investor concerns over rising rates and a potential economic slowdown weighed on stocks.

The pan-European Stoxx 600 index fell 0.6% in early trading, with all sectors in negative territory. The mining sector saw the steepest declines, dropping 1.6%, while travel and leisure stocks slid 1.2%.

The FTSE 100 in London dropped 0.7%, the German DAX slipped 0.9%, and France’s CAC 40 declined 1.3%. Italy’s FTSE MIB also opened 0.8% lower.

The declines followed a mixed day on Wall Street, where the S&P 500 ended marginally lower while the Dow Jones Industrial Average eked out a slight gain. Investors remained cautious as they absorbed the latest interest rate forecast from the U.S. Federal Reserve.

Bank of England Widely Expected to Raise Rates Again

The Bank of England is poised to announce its latest monetary policy decision, with markets betting on a 0.5 percentage point rate increase. This would bring the key benchmark rate to 2.25%, the highest since 2008.

The BoE has been aggressively tightening policy to combat surging inflation, which hit 9.9% in the U.K. last month. Prices have soared due to supply chain disruptions and the impact of the war in Ukraine.

“The Bank of England is widely expected to raise rates by 50 basis points,” said Michael Hewson, chief market analyst at CMC Markets UK. “It would be a surprise if they didn’t.”

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Other central banks also have decisions today, including Sweden’s Riksbank, the Swiss National Bank, Norway’s Norges Bank and Turkey’s central bank. Each is expected to hike rates to varying degrees as they grapple with multi-decade high inflation.

Stocks React to Hawkish Fed

Global stocks have pulled back this week after the U.S. Fed signaled it aims to keep interest rates higher for longer to tame inflation.

The Fed on Wednesday raised its benchmark rate by 0.75 percentage points, the third consecutive hike of that size. It also projected rates surpassing 4% this year and remaining above 4% through 2023. Higher rates aim to cool demand and curb rising prices but also raise concerns about an economic slowdown.

“I think we have got a downturn coming,” said James Athey, investment director at Aberdeen Standard Investments. “That is clearly the Oracle of Jackson Hole’s view.”

The hawkish stance from the Fed weighed on U.S. stocks. The Nasdaq Composite fell 1.2% and entered a bear market, defined as a 20% drop from a recent peak.

In Asia, Japan’s Nikkei shed 0.6% and Hong Kong’s Hang Seng Index declined 1.2%.

ECB Also Set to Raise Rates in October

The pressure on central banks to tame inflation has intensified after the hotter-than-expected U.S. consumer price index report last week. It showed annual inflation running at 8.3% in August, not far from the 40-year high of 9.1% in June.

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“We had expected inflation to have peaked and to be declining by now,” said David Page, head of macro research at Axa Investment Managers. “The Fed needs to see clear evidence of a slowdown in underlying inflation.”

The European Central Bank also plans to continue hiking rates following a record 75 basis point increase earlier this month. The ECB meets again in October and markets expect another large hike.

“The 75 basis point rate hike in September was only the beginning,” said Ulrike Kastens, Europe economist at DWS. “Further interest rate hikes will follow to bring inflation back to target.”

The ECB aims for inflation around 2% over the medium term. In the 19 countries using the euro, inflation accelerated to 9.1% in August — a record high.

Economic Uncertainty Clouds Outlook

Along with rising rates, uncertainty about the economic outlook added to investor unease on Thursday. Several major economies in Europe appear headed for recession as high energy prices squeeze consumers and businesses.

Germany, the largest economy in the euro zone, could witness a contraction in the current quarter, analysts warned. Surging gas prices have disrupted industrial activity in the country.

“With gas prices continuing to surge, rationing is inevitable,” said Michael Tran, commodity strategist at RBC Capital Markets. “Demand will be destroyed. We expect Europe to plunge into recession.”

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In this environment, analysts said volatility is likely to shake stock and bond markets. Investors remain nervous about the impact of tighter monetary policy.

But some strategists argued that much of the damage to markets from interest rate hikes may already be priced in.

“Equities in general have repriced year-to-date,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “Much of the effects of policy tightening is now reflected.”

Now central banks must walk a thin line between curbing inflation and avoiding unnecessary economic pain. How well they navigate this challenge will determine the path forward for global markets.

In Summary

European stocks slid as central banks prepared to raise interest rates further to fight inflation.

The Bank of England was seen hiking rates 50 basis points to 2.25%, the highest since 2008.

Markets digested the hawkish rate projections from the U.S. Federal Reserve.

Rising rates stoked concerns of an economic downturn in Europe and globally.

Investors await clarity on how aggressively central banks will move to curb price pressures.

Strategists argue much of the policy impact is already priced in, limiting downside for stocks.

For continued coverage of central bank decisions and market reactions, keep following our markets coverage. Check back for the latest European stocks news and analysis.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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