European, US markets slump over hawkish Fed comments

European and US stock markets slumped on Friday as investors dwelled on the prospect of rising US interest rates. Europe’s main bourses all fell nearly two per cent.

On Wall Street, the Dow was also down by 1.4 per cent, with the S&P 500 and tech-heavy Nasdaq Composite showing losses of around one per cent.

“It is turning into a bit of a black Friday for risk assets in what looks like a mini taper tantrum,” said market analyst Fawad Razaqzada at ThinkMarkets. The reference is to a 2013 panic on markets after the US Federal Reserve indicated it would begin to slowly reduce is stimulus measures for the economy.

With renewed measures by the Fed and other central banks propping up economies that are rebounding as the COVID-19 pandemic eases, investors have been worrying about similar moves to reduce stimulus measures and hike interest rates.

On Wednesday, Fed officials held interest rates and stimulus measures steady as expected.

But a survey indicated that their median outlook for interest rate hikes has shifted to 2023 from 2024 previously. And a considerable number indicated they see interest rate hikes next year.


Picture shown is for illustrative purposes only.

That sent Wall Street stocks lower on Wednesday, but they traded mixed on Thursday.

Saint Louis Fed chief Jim Bullard, who will vote on the monetary policy committee next year, said on TV early on Friday that he expects an interest rate hike next year, which sent US stock futures lower ahead of the opening bell.

“Investors fear that with inflation rising rapidly, QE (quantitative easing or stimulus) might be tapered sooner than expected,” Razaqzada said.

However, Chris Beauchamp, chief market analyst at online trading platform IG, said one shouldn’t read too much into the drop as many stock options and futures contracts expire on Friday.

“Heavy losses in Europe and in the US are being influenced by options expiry but the second half of this week has taken on a distinctly ‘risk off’ feel,” said Beauchamp.

He said investors are reassessing if the Fed has shifted in its concerns after having spent the past several months reassuring investors that inflation would just be transitory.

Beauchamp said “the world’s most powerful central bank appears to have shied away from the implications of such a policy and instead has gone back to the usual playbook of worrying about inflation.”

If investors conclude that is indeed the case, it “could signal the start of a much more volatile period for markets”, he added.

With the post-pandemic recovery well under way in most countries as vaccination campaigns roll out and containment measures are eased, the general mood across trading floors has been positive.

The blockbuster growth enjoyed this year has seen stocks strike new highs, but that has prompted inflation worries as surge in buying spurred by pent-up demand for goods along with supply constraints and bottlenecks has sent prices rocketing.

That, in turn, has raised concerns central banks may tighten their ultra-loose monetary policies earlier than previously flagged.


Picture shown is for illustrative purposes only.

Copper on Friday was on track for its biggest weekly fall since March 2020 after the US Federal Reserve signalled that it would begin to tighten monetary policy and China said it would sell state reserves to limit prices.

The shift in tone from the Fed also pushed the US dollar towards its largest weekly gain since September, making metals more expensive for buyers with other currencies.

Benchmark copper on the London Metal Exchange (LME) was down 0.8% at $9,238 a tonne at 1033 GMT and down around 7.5% this week.

The sell-off follows a remarkable rally, with the metal used in power and construction reaching a record high of $10,747.50 in May.

“We probably have seen the peak for this year,” said ING analyst Wenyu Yao, adding that rising demand from infrastructure building and electrification would likely keep prices around current levels in the coming years.

FED: Fed officials, increasingly confident the U.S. economy is recovering fast from the pandemic-induced recession, have begun telegraphing an exit from the central bank’s extraordinarily easy monetary policy.

Analysts at Macquarie said they expected China’s state metal sales to be relatively small - around 300,000-500,000 tonnes for aluminium - and to decrease as prices come down.

Macquarie also said it expected a deficit of copper this year, small surpluses over 2022-24 and structural undersupply from 2025. They said prices would average around $8,000-$9,000 over the next four years.

Copper was hovering around its 100-day moving average at $9,242. A move below that level could trigger more selling.

 Copper inventories in LME-registered warehouses continued to increase, rising by 24,925 tonnes to 168,675 tonnes, the highest since April.

Stockpiles in warehouses registered with the Shanghai Futures Exchange fell by 8,440 tonnes to 172,527 tonnes in the week to Friday.