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European stocks followed Asia sharply lower on Thursday, after minutes from the Federal Reserve’s last meeting signalled the US central bank planned to raise interest rates further to combat inflation.
The pan-European Stoxx 600 lost 0.8 per cent, extending losses from the previous day, while France’s Cac 40 fell 1.3 per cent and London’s FTSE 100 dropped 0.7 per cent. Companies sensitive to consumer spending lead declines across the board, with travel and leisure stocks like Tui and International Airlines Group down 3.7 per cent and 3.3 per cent respectively.
The falls followed hawkish comments from officials at the US central bank, with minutes from the June meeting of the rate-setting Federal Open Market Committee indicating that “almost all” participating officials believed additional increases in the Fed’s benchmark rate would be “appropriate”. They also characterised inflation as “unacceptably high”.
The June meeting had marked a break from the Fed’s relentless drive to bring down inflation from a multi-decade high last year. It was the first time the US central bank opted to keep the federal funds rate unchanged in 10 consecutive meetings.
On Wall Street, stocks finished the day lower following the minutes’ release, with the broad S&P 500 index and the tech-focused Nasdaq Composite both edging down 0.2 per cent.
The yield on the policy sensitive two-year Treasury rose 0.02 percentage points to 4.97 per cent, hitting its highest point since the regional banking crisis in early March. The yield on the benchmark 10-year note rose by the same amount to 3.96 per cent. Bond yields rise as prices fall.
“Presuming the upcoming employment and consumer price index reports continue the themes that bothered [Fed officials] last month, we reckon the odds of a rate hike on July 26 have increased,” said Stephen Innes, managing partner at SPI Asset Management in Hong Kong.
Futures contracts pointed to the S&P 500 opening 0.4 per cent lower on Thursday, while those tracking the Nasdaq 100 slipped 0.5 per cent.
US payrolls data is set to be released on Friday, with economists polled by Bloomberg tipping the pace of hiring to have slowed in June. However, the median forecast has underestimated jobs data for 14 consecutive months.
Hong Kong’s Hang Seng index led markets lower with a fall of 3.1 per cent, while Australia’s S&P/ASX 200 and Japan’s Topix shed 1.2 per cent and 1.3 per cent respectively. In China, the CSI 300 index of Shanghai- and Shenzhen-listed shares fell 0.7 per cent.
Sentiment in Hong Kong was also weighed by growing expectations of monetary easing that could squeeze Chinese banks’ returns. The Hang Seng Mainland Banks index was down nearly 6 per cent, with some of the banks trading ex-dividend.
“If you lower interest rates, it means banks’ profits will fall, and the renminbi will test lower levels as well,” said Louis Tse, founder of Hong Kong-based Wealthy Securities. “These factors are pushing investors to sell Chinese bank stocks.”
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