European stocks pause as Fed hints at rate hike

A picture shows the signage outside the entrance of the London Stock Exchange in central London. (AFP Photo/Leon Neal)

LONDON: European equities dipped on Thursday (Oct 29) after the US Federal Reserve hinted at a potential December interest rate rise, sparking fresh investor uncertainty.

News of a possible hike before year-end took the wind out of an advance across global markets in October supported by expectations that an increase would be delayed.

"The Fed has just created more uncertainty in the markets," said analyst Craig Erlam at trading firm Oanda. "The statement was undoubtedly more hawkish than before and put December well and truly back on the table and investors did not really know how to take this."

The US central bank kept interest rates at record lows on Wednesday but expressed faith in the outlook for the world's top economy noting what it called "solid" consumer spending and business investment.

Data since last month "suggests that economic activity has been expanding at a moderate pace", the Fed said. It then explicitly pointed to the possibility of a rate hike in its next meeting in December, dampening hopes it would stay its hand until March.

Capital Economics research consultancy indicated it thought a rate rise was unlikely short term. "Our view is still that the November and December employment reports won't be strong enough to convince a majority of (Fed) members to back a rate hike, but December isn't completely out of the question," it said.

Further bad US news came in the shape of slightly slower growth than expected in the third quarter as exports and private investment fell. The Commerce Department saw a downturn in private inventory investment as a drag on GDP, which expanded at an annual rate of 1.5 per cent in July-September after advancing at a 3.9 per cent clip in the second quarter.

Questions over US economy

The United States is the world's biggest economy and a rate hike would therefore have a damaging global impact if its monetary policy is tightened too soon, according to analysts.

"The problem with the Fed rate hike would be that not everybody is convinced that the US economy is strong enough at the moment to withstand this, without economic growth slowing even further than it already has," said Markus Huber at London-based brokerage Peregrine & Black.

"If they choke growth by hiking rates too early, countries like Germany, who rely heavily on exports, will suffer," he told AFP, with no country immune to a US slowdown. Huber added that China's slowdown also increased investor uncertainty, darkening the European stocks picture.

On major European markets, London's benchmark FTSE 100 index of major blue-chip companies pulled back 0.65 per cent to 6,395.80 points.

In the eurozone, Frankfurt's DAX 30 shed 0.29 per cent to close at 10,800.84 points, losers led by Lufthansa and Deutsche Bank, while the Paris CAC 40 gave up a meagre 0.1 per cent to 4,885.82.

Wall Street was mixed in mid-afternoon trading. The Dow Jones Industrial Average was off 0.19 per cent at 17,745.414 points but the broad-based S&P 500 was ahead 0.27 per cent to 2,090.35, while the tech-rich Nasdaq Composite Index dropped 0.29 per cent to 5,080.93.

Shell, Deutsche battered

In London, Royal Dutch Shell's 'A' share price closed down 1.52 per cent to 1,711.50 pence after it posted a huge US$7.42-billion third-quarter net loss on massive write-downs after slumping oil prices forced it to scrap costly projects in Alaska and Canada.

Germany's biggest lender Deutsche Bank was a major loser in Frankfurt, nosediving 7.26 per cent to €25.48 after unveiling a massive new cost-cutting drive involving cutting thousands of jobs and closing operations in 10 countries on record third quarter losses of €6.01 billion.

National airline Lufthansa also flew sharply lower, losing 8.37 per cent to end at €13.09 despite higher than expected quarterly results amid profit taking and cost-cutting warnings.

In foreign exchange activity, the European single currency climbed to US$1.0962 from US$1.0921 late in New York on Wednesday. The shared eurozone unit had plunged on Wednesday in the wake of the Fed news to US$1.0897 - a level last seen in early August.