European stock markets wary of another swoop by hawkish Fed chief

March 02, 2018 | 11:08

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LONDON: Stock markets wavered on Thursday (Mar 1) as the head of the US Federal Reserve delivered a fresh speech amid concern by investors over the pace of interest rate hikes.

european stock markets wary of another swoop by hawkish fed chief

The London Stock Exchange logo is pictured in London. Photo: BEN STANSALL/AFP/Getty Images

The volatility seen across stock markets during much of February has returned on worries that a strong US economy and President Donald Trump's tax cuts will lead the Fed to tighten borrowing costs more than previously thought.

After Wall Street opened more or less flat, it wobbled in and out of loss as new Fed boss Jerome Powell delivered his second speech to lawmakers this week.

In late morning trade the Dow was down 0.2 per cent, after having lost 1.5 per cent on Wednesday.

Meanwhile, Europe stocks moved firmly lower, with London ending the day down 0.8 per cent. Paris shed 1.1 per cent and Frankfurt fell 2.2 per cent.

Most Asian markets also ended the day lower.

Powell triggered a new bout of selling after presenting an upbeat assessment for the economic outlook in his first presentation to US lawmakers on Tuesday, which markets interpreted as "hawkish", or supportive of raising interest rates more than the three times expected this year.

During his testimony on Thursday, Powell reiterated the central bank will continue to raise rates gradually to keep unemployment and inflation in balance.

"By continuing to gradually raise interest rates over time, we're trying to balance those two things and achieve inflation moving up to target but also make sure the economy doesn't overheat," Powell told the Senate Banking Committee, according to Bloomberg News.

Data released on Thursday confirmed the Fed's estimates that inflation will pick up and the labour market tighten, reasons for it to push forward with interest rate hikes.

The Fed's preferred measure for inflation jumped 0.4 per cent last month, which was stronger than in previous months, while first-time unemployment claims fell to a 48-year low last week.

"US markets are a mixed bag, but weak volatility is the common theme," said market analyst David Madden at CMC Markets UK.

"Traders are keeping an eye on the screen and an ear out for US Federal Reserve chief Jerome Powell's speech," he added.

HIGHER RATES HURT FIRMS

Investors are mostly concerned that the Fed will have to hike rates by more than currently anticipated, in particularly if growth in wages starts to accelerate, something that Powell said doesn't appear yet to be the case.

"When interest rates look set to rise, stocks tend to fall," City Index analyst Fiona Cincotta told AFP.

"A higher interest rate environment is not beneficial for most firms. This is because higher interest rates make it costlier for companies to borrow money," the expert explained.

"Increased costs meant lower profits. It is this fear of higher interest rates dampening company profits which is causing equities to sell off."

Adding to the unease are the relatively high valuations of stocks, despite recent slides, after a stellar 2017 and January that saw some indices hit record or multi-year highs.

On currency markets, the pound continues to struggle against the dollar on worries about faltering Brexit talks.

In Asian trading, Tokyo finished 1.6 per cent lower on Thursday, with a stronger yen hitting exporters, while Sydney and Singapore each shed 0.7 per cent.

However, Hong Kong recovered initial losses to end up 0.7 per cent, while Shanghai rose 0.4 per cent.

These two markets won support from a better-than-expected private reading on Chinese factory activity from financial news magazine Caixin, after the official reading had showed growth in manufacturing at its slowest pace in 19 months.

Elsewhere on Thursday, both main oil contracts extended losses following another build in US crude stockpiles.