European markets and US stock futures fell Thursday, a day after the Fed got tough on inflation with its biggest rate hike since 1994.
US stocks had closed higher on Wednesday after the Federal Reserve hiked interest rates by an aggressive three-quarters of one percent. Asian markets had also mostly risen on Thursday.
However, the rally did not last long, as investors worried about the impact the big jump in interest rates will have on economic growth.
Japan’s Nikkei 225 (N225) and Korea’s Kospi closed up 0.4% and 0.2%, respectively. But, China’s Shanghai Composite was down 0.6% at the end of the day. Hong Kong’s Hang Seng Index was the biggest loser in the region, down 2.5% in late afternoon trading.
While US futures had risen during early Asia hours, they reversed course later and by 8.30 a.m. ET Dow and Nasdaq futures were down 1.7% and 2.4% respectively. S&P 500 futures were down about 2%.
Hang Seng tumbles
Other central banks were in action on Thursday.
The Bank of England raised interest rates by 25 basis points in its fifth increase in borrowing costs since December and warned that UK inflation could exceed 11% in October.
The Swiss National Bank also hiked rates for the first time in 15 years, defying many economists’ expectations. It increased rates from minus 0.75% to minus 0.25% in a bid to hold down inflation.
The Hong Kong Monetary Authority (HKMA) on Thursday increased its policy rate by 75 basis points to 2%.
Hong Kong’s monetary policy moves in lockstep with the Fed, as its currency is pegged to the US dollar in a tight range. The city is compelled to raise rates to prevent rising outflows when the Fed tightens.
But rising interest rates could also derail Hong Kong’s still fragile economic recovery from the Covid-19 pandemic. Last month, the city downgraded its growth forecast for 2022 to a range of 1% to 2%, compared with 2% to 3.5% previously.
Eddie Yue, president of the HKMA, said Thursday that widening interest rate spreads between the US and Hong Kong markets could lead to rising outflows from the city, but Hong Kong has ample liquidity in the banking system and strong capital buffers.
Wednesday’s US rate hike — the largest in 28 years — signaled to investors that the Fed is committed to lowering inflation rates. Fed chair Jerome Powell indicated that a similar hike could come in July if the economic data doesn’t improve.
“Given the persistence of inflation and the Fed’s resolve to bring it down, its seems likely that July meeting could see another 75 [basis-point] rate hike,” said Kerry Craig, global market strategist for JP Morgan Asset Management, in a note on Thursday.
“Just like in other areas of the world, emerging Asian markets are not able to escape the inflation pressures, particularly from rising food prices, and we expect further policy tightening across Asian central banks in response,” he said.
– CNN Business’ Nicole Goodkind contributed to this report.