Global equities sank on Thursday after the US Federal Reserve delivered a ‘hawkish cut’ to interest rates, sending a wave of disappointment through financial markets.
The Bank of England helped stem the selling with hints of rate cuts in the new year, despite keeping rates on hold at 4.75%.
So much for a Santa rally.
The FTSE 100 shed 1% in early trade after the Federal Reserve cut rates by 25bps to 4.25% – 4.5%. After being accused of moving too slowly to make their first cut after the hiking cycle, the Federal Reserve has now slashed rates by 1% since September.
Selling picked up as the session progressed before the Bank of England’s rate decision and accompanying commentary helped spark a small rally from the lows in the FTSE 100. The index was down 1.1% at the time of writing.
“European markets posted sharp losses in early trading,…tracking a global selloff sparked by the US Federal Reserve’s hawkish shift,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.
“While the Fed delivered a widely expected 25bps rate cut, its projection of just two cuts in 2025 – down from four in September – rattled investors around the globe.”
As we mentioned earlier in the week, traders would be unphased by the actual decision and would be more concerned about the Federal Reserve’s policy projections for next year.
Stubbornly high inflation and the surprising resilience of the US economy were behind the Fed’s revised borrowing cost projections, which now see fewer rate cuts next year.
“US markets played the part of Scrooge on Wednesday, tumbling as the Federal Reserve’s hawkish tone dampened holiday cheer, with the S&P 500 shedding 2.95%, the Nasdaq sliding 3.62%, and the Russell 2000 plunging 4.46%,” Britzman explained.
“The Fed’s latest 25bps rate cut was as expected, but policymakers signalled just two cuts for 2025 – half of what was anticipated last quarter. This shift sent the 10-year Treasury yield up 11 basis points to 4.51%, adding further pressure to equity markets. Wall Street’s reaction underscores the Fed’s delicate balancing act as it tightens its outlook on easing, forcing markets to recalibrate their rate expectations. Investors should see this as a healthy spot of profit-taking rather than an end to the party, after what’s been a fantastic run for markets since the US election.”
The Federal Reserve’s interest rate decision was followed by the Bank of England’s interest rate decision to keep rates on hold, voting 6-3 in favour of keeping rates on hold.
Bank of England
Governor Bailey provided little insight into when the Bank of England would cut again, but comments about wages and slow growth gave a dovish tone to accompanying commentary.
“It remains highly likely the Bank will continue to follow its data dependent path and cut rates in the New Year, perhaps as early as its first meeting in February, but we expect only a gradual withdrawal of more restrictive policy over the course of 2025,” said Rob Morgan, Chief Investment Analyst at Charles Stanley.
The BoE rate decision and insight provided some reprieve for UK stocks, but cyclical sectors, including miners, banks and financials, remained in the red.
Housebuilders spiked higher after the rate announcement, with Persimmon jumping 1.3% in seconds.
Intermediate Capital Group was the top faller, falling 4%, despite receiving a price target upgrade.
Although investors are clearly upset with the new trajectory for interest rates, the earnings picture for US stocks still looks strong. Today’s dip may prove to be a buying opportunity for US stock once the dust settles.
The UK’s outlook is slightly less clear, with questions being asked about government policy and sentiment on the floor. That said, uncertainty such as this can be a precursor for a rally.