Global stocks fell on Thursday after the US Federal Reserve (Fed) implemented “hawkish interest rate cuts”, sending a wave of disappointment across financial markets.
The Bank of England helped stem the sell-off by hinting at a rate cut in the new year, even as it kept interest rates unchanged at 4.75%.
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So much for Santa Rally.
The FTSE 100 index fell 1% in early trading after the US Federal Reserve cut interest rates by 25 basis points to 4.25% to 4.5%. The Fed has cut interest rates by 1% since September after being criticized for moving too slowly for the first rate cut after a cycle of hikes.
Selling increased as trading progressed ahead of the Bank of England’s interest rate decision, and accompanying comments triggered a small rebound from its lows in the FTSE 100 index. At the time of writing, the index was down 1.1%.
Matt Blitzman, senior equity analyst at Hargreaves Lansdown, said: “European markets suffered significant losses in early trading, and the US Federal Reserve’s “We tracked the decline in stock prices.”
“While the Federal Reserve delivered the widely expected 25bps rate cut, the outlook for only two rate cuts in 2025, down from four in September, has spooked investors around the world.”
As mentioned earlier this week, traders will be unfazed by the actual decision and will be more concerned about the Federal Reserve’s policy projections for next year.
Stubbornly high inflation and the surprising resilience of the U.S. economy are behind the Fed’s revised borrowing cost forecast, which now expects fewer interest rate cuts next year.
“U.S. markets played Scrooge’s role on Wednesday, falling as the Federal Reserve’s hawkish tone dampened the holiday cheer, with the S&P 500 index down 2.95%, the Nasdaq index down 3.62%, and Russell The 2000 index fell by 4.46%,” Blitzman explained.
“While the Fed’s latest 25bps rate cut was as expected, policymakers had only suggested two cuts in 2025, half of what they expected in the previous quarter. Treasury yields rose 11 basis points to 4.51%, adding to pressure on the stock market. The reaction highlights the delicate balancing act the Fed is making as it tightens its outlook for easing, forcing markets to readjust their interest rate expectations, a remarkable development since the US presidential election. However, investors should not view this as the end of the party, but as a sound profit-taking opportunity.
Following the Fed’s decision, the Bank of England also decided to keep interest rates on hold, with a 6-3 vote in favor of keeping rates on hold.
bank of england
Bailey offered little insight into when the Bank of England might cut rates further, but his comments, which were accompanied by comments on wages and slowing growth, gave a dovish tone.
“While it remains likely that the Bank will continue on a data-dependent path and cut rates at its first meeting in the new year, perhaps as early as February, we expect more restrictive policies to be phased out throughout 2025. ” said Rob Morgan, chief investment analyst at Charles Stanley.
The Bank of England’s interest rate decisions and insights provided some respite for British equities, but cyclical sectors including mining, banking and financials remained in the red.
Homebuilders soared after the rate announcement, with Persimmon rising 1.3% in seconds.
The top decliner was Intermediate Capital Group, which fell 4% despite raising its price target.
While investors are clearly spooked by the new trajectory for interest rates, the earnings outlook for U.S. stocks still looks solid. Once the situation subsides, today’s decline could be a buying opportunity for U.S. stocks.
The outlook for the UK is somewhat uncertain, with questions being asked on the floor about government policy and sentiment. That said, such uncertainty could portend an upswing.
