European and Asian stocks fall after Jay Powell warns on interest rates

European and Asian stocks fell on Wednesday as a warning from the Federal Reserve that it was prepared to return to bigger interest rate rises to fight inflation weighed heavily on markets.

At the open the region-wide Stoxx 600 fell 0.2 per cent, London’s FTSE 100 was down 0.3 per cent and the Cac 40 in Paris lost 0.1 per cent.

The moves followed heavy falls for many of Asia’s biggest markets. The Hang Seng in Hong Kong dropped 2.4 per cent and South Korea’s Kospi lost 1.4 per cent.

The declines came after Jay Powell, chair of the Federal Reserve, told a congressional hearing in Washington that the US central bank may need to raise interest rates more aggressively if the economy and inflation do not cool.

Successive data releases in February, such as consumer price inflation, have shown an economy in the grips of sticky inflation despite a year-long campaign of higher interest rates. Powell is scheduled to speak again on Wednesday, to the House financial services committee.

Bond yields rose and stocks fell overnight on Wall Street as investors began to expect the Fed to raise rates by half a percentage point at its next meeting, instead of the quarter percentage point as previously expected.

Emmanuel Cau, head of European equity strategy at Barclays, said that Powell’s speech was “very much” the cause of equity declines. “We are back to square one, where Federal Reserve communication is forcing markets to reprice. The market now needs some ‘bad’ data, as if you end up with more pointing towards a hot economy it will have to price a 50 basis point hike.”

Investors will be carefully watching the release of US non-farm payroll and unemployment data on Friday.

The yield on two-year US Treasuries, which are more sensitive to monetary policy, rose 0.04 percentage points to 5.05 per cent. On Tuesday, the two-year yield rose above 5 per cent for the first time since 2007.

The yield on US 10-year notes rose 0.02 percentage points to 3.99 per cent. The yields on 10-year German Bunds increased 0.01 percentage point to 2.7 per cent.

US equity futures ticked up slightly on Wednesday, with both the blue-chip S&P 500 and tech-heavy Nasdaq rising 0.1 per cent. On Tuesday the S&P lost 1.53 per cent, its biggest daily loss in a fortnight.

The dollar index, which measures the greenback against a basket of six peer currencies, rose 0.1 per cent on Wednesday to its highest point since early December.

In commodities Brent crude was down 0.4 per cent at $83 per barrel, while US equivalent West Texas Intermediate was down 0.5 per cent at $77.2 per barrel.