Global markets plunge on hawkish Fed

Global stock markets dropped sharply Friday after the Federal Reserve warned of an aggressive tightening of financial policy to tame runaway inflation.

Frankfurt lost 2.5 percent at the close, and Paris ended off 2 percent as investors shrugged off a survey showing the EU bloc’s monetary interest expanded in April while London lost 1.4 percent on the session.

Wall Street followed the glum fashion because the Dow turned into 1.6 percent inside the pink mid-session while the S&P index and the tech-wealthy Nasdaq both confirmed comparable losses.

Helping to batter London was a sterling slump against the dollar to an 18-month low after data showed tumbling British retail sales amid a cost-of-living crisis. The euro also slid against the US currency.

Oil prices slumped on demand fears arising from rising interest rates in the United States and ongoing Covid restrictions in China.

“(Price) risks are certainly more tilted to the upside, given the war in Ukraine and a potential embargo on Russian exports, but lockdowns in China and the risk of a Fed-driven economic slowdown are also significant,” observed Craig Erlam, Senior Market Analyst.

Fed Chairman Jerome Powell, who has signaled that the Fed will have to move more aggressively to counter decades-high US inflation, stated on Thursday that a half-point interest rate increase was “on the table” for next month’s meeting, sending Wall Street tanking.

“Further hawkish comments from the Federal Reserve Chair put another cat among the pigeons in a day of violent swings,” said Richard Hunter, head of markets at Interactive Investor.

“Quite apart from the widely expected 0.5 percent rate hike in May, this could also imply similar rises in subsequent months.”

That stoked worries the Fed could send the US economy’s pandemic recovery back into reverse.

“While the news should not have come as too much of a surprise, investors rushed for the exit as concerns of over-tightening and recession came back into focus,” said Hunter.

Fawad Razaqzada, the market analyst with City Index and FOREX.com, said the Fed signaling had left sentiment downbeat and that “the damage has already been done.”

Nonetheless, Thomas Mathews, markets economist with Capital Economics, forecast that “this hiking cycle looks increasingly likely to be a sharp but short one in most cases, potentially ending as soon as next year.”

Sharp price rises are forcing major global central banks to hike interest rates, in turn curbing recovery from the pandemic.

Higher lending rates tend to weigh on companies’ share prices as they increase interest repayments on loans, while also further reducing consumers’ incomes.

In Asia in advance, Tokyo shares slid more than 1.5 percent while inflation data from Japan became in line with market expectations.

But Shanghai finished marginally better as a few Chinese Covid curbs were eased and the country’s securities regulator driven banks and insurers to buy more shares to lift sick equities.