The FTSE 100 has felt the pressure of tightening monetary policy in the last 24 hours after the Federal Reserve hiked rates last night and the Bank of England followed suit today.
US stocks were down heavily overnight and the selling spilled over into the European session.
The Federal Reserve hiked rates by 25bps to 4.75% while the Bank of England hiked 25bps to 4.25%.
The Bank of England had little choice but to hike rate after UK inflation accelerated to 10.4% as in February the costs of salads helped push up benchmark CPI.
“The UK is in an economic danger zone,” said Charles White Thomson, CEO at Saxo UK.
Despite the weakness at the beginning of the session, the FTSE 100 edged off the lows as the session progressed. The BoE decision to hike 25bps saw the FTSE 100 back above 7,500.
There is consensus building major central banks are nearing the end of their hiking cycles and this helped the FTSE 100 of the worst levels of the session.
“We understand why there is a growing chorus of commentators calling for a pause here,” said Jonathan Moyes, Head of Investment Research, Wealth Club.
“The US and Europe have come very close to a banking crisis over the previous two weeks and monetary conditions will tighten significantly as a result, placing further strain on the sector.”
HSBC and Standard Chartered were among the top fallers as a stronger GBP/USD hit dollar earners.
NatWest was up 1.4% while Endeavour Mining was the best performer. Gold has been edging towards $2,000 since the start of the SVB saga.
Federal Reserve disappointment?
The selling of equities began last night after the Federal Reserve hiked rates by 25bps despite concerns recent banking failures at SVB and Credit Suisse were a result of higher interest rates.
Although economist consensus expectations were for a 25bps, some thought the Fed may take a break from rate hikes after disruption in the financial system tightened conditions. Not so.
The Fed choose to continue the fight against inflation with higher rates.
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher cost of essentials like food, housing, and transportation,” said Fed chairman Jerome Powell in a press conference following the rate decision
Many now expect the US will enter a recession this year and a pivot looks a long way off.