Stock markets fell sharply on Thursday after the announcement of a significant rate hike, raising fears of a recession.
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The drastic rate hike announced by the US Central Bank rekindled fears of a recession on Thursday, weighing on investors and causing stock markets to fall sharply and bond yields to soar. European indices accentuated their losses. At the start of the afternoon, Frankfurt and London lost just over 3%, Paris lost 2.52% and Milan 2.55%.
The New York Stock Exchange opened wide in the red. In early trading, the tech-heavy Nasdaq suffered particularly (-3.02%) while the Dow Jones and the S&P500 lost 2.31% and 2.76% respectively. The day before, Wall Street had however welcomed with relief the determination shown by the Federal Reserve (Fed) to fight against inflation while “the announcements were anything but accommodating”, according to Ipek Ozkardeskaya, analyst of Swissquote.
The Fed announced the increase in its key rates by 0.75 percentage points, the strongest monetary tightening since 1994 and not the last, the institution aiming for a range of 3.25 to 3.50% by at the end of the year. “Given that inflation will surely remain high this summer, it seems plausible that the Fed will raise rates by 75 basis points in July, 50 in September” before falling back to a 25 basis point hike at the start of winter , predicts Vincent Juvyns, strategist at J.P. Morgan AM.
Perhaps to the detriment of US economic activity: the monetary institution has significantly lowered its economic growth forecast for 2022 in the United States. Even if he wants to avoid a recession, Fed boss Jerome Powell acknowledged that there is “always a risk of going too far or not far enough. The “fact that the Fed is willing to accept worsening economic conditions” is scaring investors, according to ActivTrades analyst Pierre Veyret.
This caused a new surge in the interest rates of the debts of European countries and the United States, which took between 12 and 16 basis points. After a lackluster start to the session, the euro and the pound rallied slightly against the dollar, with the single currency gaining 0.15% to $1.0459, while the pound rose 0.55% to $1.2249 towards 1:55 p.m. GMT after the Bank of England (BoE) decided to hike rates by 0.25 percentage points.
Unlike the Fed, it hasn't decided to raise rates more aggressively in the face of inflation, but it “will be particularly attentive to indications of persistent inflationary pressures and will respond forcefully if necessary”, it promises in the minutes of its meeting. The BoE is now expecting inflation to peak at “more than 11%” in October, in April the rise in prices had reached 9% over one year.
Tech, particularly dependent on interest rate to finance its growth, suffered the blow. In New York, Alphabet, the parent company of Google, lost 1.86% in early trade, Microsoft 2.29% while Apple and Meta (Facebook) tumbled more than 3%.
In Frankfurt, Zalando fell by 11.00%, Delivery Hero by 6.82% and Infineon by 4.94%. In Paris STMicroelectronics yielded 4.20% and Dassault Systèmes 1.43%. Deliveroo was down 5.03% in London
Energy stocks suffered
Energy sector stocks fell after further gas supply cuts from Russian giant Gazprom, whose boss said on Thursday the company would implement its own rules with its products. In Frankfurt, Uniper lost 11.31% and Siemens Energy 3.57%. In Paris, Engie fell 8.66% after seeing a “reduction in deliveries”, even if it was without “impact on the supply” of customers. Eni, which announced that Gazprom would only deliver 65% of the requested quantities on Thursday, also lost 4.87% in Milan while Enel fell by 3.40%.
For their part, the prices of oil were down after the Fed's announcements, which are likely to lower demand in the United States. The price of a barrel of Brent from the North Sea fell by 1.56% to 116.66 dollars and that of a barrel of American WTI fell by 1.03% to 113.12 dollars. Bitcoin fell 2.52% to $21,105.