European stocks fall, pound takes fresh tumble

Fears over the impact of interest rate hikes to combat sky-high inflation sent European and Asian stocks plunging on Friday.

However, after a day of steep losses, Wall Street has stabilised.

Meanwhile, the pound fell to $1.2276, a two-year low, one day after the Bank of England (BoE) warned that UK inflation would exceed 10% this year and the economy would decline.

The euro jumped to 85.92 pence, which was last seen late in 2021.

Oil prices rebounded after key producers led by Saudi Arabia and Russia refused to lift output more than their planned marginal increase as they weighed tight supply concerns caused by Moscow’s invasion of Ukraine.

“A sinking feeling has taken over financial markets at the end of a volatile week,” said Hargreaves Lansdown analyst Susannah Streeter.

“Investors are digesting the unpalatable implications of inflation and fretting that there will be a need for a bigger dose of the bitter medicine being administered to try and bring it under control.”

Asian equities tumbled after steep Wall Street losses Thursday, as traders contemplated a period of fierce monetary tightening by the US Federal Reserve.

The Fed on Wednesday lifted borrowing costs 50 basis points — the most since 2000 — and signalled more increases as inflation sits at the highest levels in decades.

Rate tightening increases borrowing costs for consumers and businesses, harming economic recovery from the pandemic.

On Thursday, US stocks plunged. The Nasdaq shares index — which is dominated by tech firms particularly sensitive to higher interest rates — tumbled five percent, while the broader Dow and S&P 500 each slumped by more than three percent.

That selloff filtered through to Asia, where Hong Kong tanked 3.8 percent Friday as tech firms took a hit.

“Concern about inflation is the culprit and the wild swings we’ve seen this week are a reminder that sentiment is about as fragile as a porcelain doll,” noted AJ Bell investment director Russ Mould.

“The other fear is that the cure for inflation, higher rates, could be as bad as the disease if they choke off growth and even lead to recession.”

European indices also slumped, with London losing 1.5 percent, Frankfurt 1.6 percent and Paris 1.7 percent.

After starting trade lower, Wall Street’s main stock indices were treading water in late morning trading.

A strong US jobs report showed the world’s top economy remains resilient, and wage growth — a key inflation worry for the Fed, was moderate.

However, the report also indicated people left the labour force last month, which will make it more difficult for the Fed to ease the tight jobs market.

“Given the record number of job openings, that is a signpost that will continue to leave the market concerned about persistent wage-based inflation pressures as employers offer wage-based incentives to attract workers,” said market analyst Patrick J. O’Hare at Briefing.com.

“The overall picture continues to support the Fed’s plan for further tightening of policy,” said Chris Beauchamp, chief market analyst at online trading platform IG.