Global stocks fall on fears of more US interest rate increases

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European and Asian stocks fell and crude oil retreated on Thursday after the Federal Reserve signalled it could keep rates higher for longer in order to tackle stubborn US inflation.

Europe’s region-wide Stoxx 600 and Germany’s Dax both fell 0.6 per cent, while France’s Cac 40 gave up 0.9 per cent at the opening bell. Asian markets also fell, with China’s benchmark CSI 300 down 0.9 per cent and Hong Kong’s Hang Seng 1.3 per cent lower.

Oil prices retreated from their 10-month peak as traders grew cautious about growth in the world’s largest economy following hawkish undertones at the Fed’s most recent policy meeting.

Brent crude slid 1.1 per cent to $92.52 a barrel, while the US equivalent West Texas Intermediate declined 1.2 per cent to $88.58 a barrel. Energy and basic materials stocks led fallers in Europe, declining 1 per cent and 0.9 per cent, respectively.

In a closely watched policy meeting on Wednesday, Fed officials agreed to keep the benchmark federal funds rate steady at a target range of 5.25-5.5 per cent, in line with market expectations. 

Yet the central bank’s policy projections released with the announcement hinted at one more quarter-point increase by the end of this year, while pencilling in only two rate cuts for 2024.

Swap markets continue to price in a 66 per cent probability that rates will remain unchanged when the Fed meets again in November, according to data compiled by LSEG and based on interest rate derivatives prices.

The move comes at a time of heightened investor anxiety over the prospects for US economic growth, more than a year after policymakers embarked on one of their most aggressive campaigns to tame inflation, choking off consumer and business demand.

Futures contracts tracking Wall Street’s benchmark S&P 500 declined 0.3 per cent, while those tracking the tech-focused Nasdaq 100 fell 0.4 per cent ahead of the New York open. Both indices declined in the previous session.

In the UK, attention turns to the Bank of England, which is due to make its own policy announcement on Thursday. The majority of investors expect the benchmark bank rate to go up by 0.25 percentage points to 5.5 per cent.

Yields on the policy-sensitive two-year UK government bond rose 0.06 percentage points to 4.9 per cent ahead of the meeting, while yields on 10-year gilts advanced 0.05 percentage points to 4.3 per cent. Bond yields rise as prices fall.

The UK central bank had lagged behind peers in the US and Europe in its efforts to cool stubborn inflation. Data on Wednesday showed annual headline inflation was 6.7 per cent in August, below analysts’ expectations but still well above the central bank’s 2 per cent target.

In Switzerland, lower inflation data allowed the Swiss National Bank to keep its policy rate unchanged at 1.75 per cent on Thursday, marking the first pause in the central bank’s tightening campaign since March 2022.