Stocks sold off sharply in the US on Thursday after Switzerland and the UK joined a global rush to raise interest rates, stoking concerns that central banks’ attempts to tame high inflation could push economies across the globe into a downturn.
The S&P 500 stock index slid 3.2 per cent for the day, a move that took the broad gauge to a 6 per cent fall this week. The declines have battered valuations in recent days as pessimism about the global economic outlook has spread, with many investors warning more restrictive monetary policies from central banks could stamp out the recovery.
In a sign of the darkening outlook, almost every stock in the S&P 500 declined on Thursday, with losses pushing the share prices of hundreds of companies down to new 52-week lows. The technology-heavy Nasdaq Composite index tumbled 4.1 per cent.
The S&P had closed the previous session 1.5 per cent higher after the Federal Reserve raised its main interest rate by a historic 0.75 percentage points, tempered by comments from chairman Jay Powell saying he expected rises of this magnitude to be relatively uncommon.
“In the short term, this Fed rate hike is negative because it will have a negative impact on earnings,” said Kristina Hooper, chief global macro strategist at Invesco. “Over a longer time frame it can be a positive in terms of front-loading rate hikes and controlling inflation.”
The Fed’s decision was followed on Thursday by the Swiss National Bank raising its policy rate for the first time in 15 years — topping forecasts with a 0.5 percentage point increase — in the latest sign of how central banks are stepping up their efforts to tackle inflation.
Along with a rate hike by the Bank of England, it reignited fears that attempts by central banks to curb inflation could lead to sharply slower growth worldwide or a recession.
“That is what people are assessing today — what is the probability of a potential recession and will corporate profits come in where analysts estimates are or will those get taken down,” said Tom Hainlin, global investment strategist at US Bank Wealth Management’s Ascent Private Wealth Group in Minneapolis. “The Swiss came out and surprised everybody today.”
“The SNB has for so long been in the ultra-dovish camp,” said Francesco Pesole, a currency strategist at ING. “If even they are hiking, it’s sending a message to markets that central banks are looking at this summer as their last chance to do something about inflation before we hit a global slowdown.”
The Swiss franc rose 1.9 per cent against the euro on Thursday to about €0.98.
Europe’s regional Stoxx 600 share index, which had rallied on Wednesday after the European Central Bank promised a new mechanism to support weaker euro zone nations from rising interest rates in the bloc, closed 2.5 per cent lower.
Dublin’s Iseq index fared better than some of its European peers but still gave up another 2 per cent on the day.
The Bank of England on Thursday also lifted its benchmark interest rate, by 0.25 percentage points to 1.25 per cent. Ahead of the announcement, investors had been divided over whether they expected a quarter-point or half-point rise.
The ECB had said on Wednesday that it would “accelerate the completion of the design of a new anti-fragmentation instrument” to support the euro zone’s most indebted nations.
“They have a plan to develop a plan, but the market wants more detail,” said Willem Sels, global chief investment officer at HSBC’s private bank.
The head of the European Central Bank, Christine Lagarde, briefed euro zone finance ministers on the planned tool to fight high spreads between bond yields of the bloc’s nations, but remained vague about how and when the new scheme may kick in, sources said.
Speaking after the meeting in Luxembourg, eurogroup chief Paschal Donohoe said the finance ministers did not discuss any conditions that should be tied to the plans by the ECB.
“We did not touch on any issues in relation to conditionality for decisions that the governing council of the ECB may make in the future,” the Minister for Finance said. — Copyright The Financial Times Limited 2022
