European stocks fell Thursday as a sell-off that started with highly-rated technology stocks accelerated after the US central bank announced a swift end to its pandemic-era monetary stimulus.
The regional Stoxx 600 index fell 1.1 percent, London’s FTSE 100 fell 0.6 percent and Germany’s Xetra Dax lost 1.1 percent.
The Stoxx hit an all-time high on Wednesday as traders responded to easing fears of the Omicron coronavirus variant by transferring money from beneficiaries of the tech lockdown to the banks and energy groups heavily represented in European indices.
Thursday morning, all sectors of the Stoxx fell. While the technology sub-index underperformed, the industrial groups fell 1.2 percent and the basic materials sectors 0.7 percent.
The measures came after the minutes of the latest Federal Reserve meeting revealed that central bank officials, which have boosted financial markets since March 2020 with a massive bond-buying program and record-low interest rates, are broadly agreed that it was time to accelerate the withdrawal of this support.
“Markets are awakening to the end of easy money,” said Olivier Marciot, cross-asset investment manager at Unigestion.
“We’ve had a lot of quantitative easing and monetary support, which creates an environment where all assets tend to thrive, and if you take that away, it’s the other way around,” he added. “It’s a correlation shock where everything gets battered at the same time.”
The Fed’s minutes also indicated that the world’s most influential central bank may need to raise interest rates “sooner or sooner” than officials initially expected to contain rising inflation.
Wall Street’s technology-focused Nasdaq Composite stock index fell 3.3 percent on Wednesday, in its worst session since February 2021. Low interest rates may justify higher stock prices because they make future earnings of companies more valuable, with this effect amplified most for technology and other start-up companies.
But the prospect of higher borrowing costs also appeared in all US markets. The Dow Jones Industrial Index, which had reached an all-time high earlier in Wednesday’s session as trading was dominated by a theme of economic recovery, closed 1.1 percent lower.
US Treasury prices also fell in response to signals from the Fed that it will now discuss how to shrink its balance sheet, which has more than doubled to just under $9 trillion since early 2020 as the central bank owns it. expanded aggressively from Treasury bills and mortgage-backed securities.
The 10-year Treasury yield, which moves inversely with the price, rose 0.02 percentage point to 1.725 percent. This benchmark yield on debt, which affects financing costs and asset valuations worldwide, rose from about 1.63 percent early this week.
European government bonds were dragged into the post-Fed selloff. Germany’s 10-year yield climbed to minus 0.05 percent, its highest level since May 2019. The eurozone’s riskier debts were also hit, with Italy’s 10-year yields above 1.3 percent for the first time since July 2020 came out.
In Asia, Japan’s Nikkei 225 closed about 2.9 percent lower and the CSI 300 in mainland China closed 1 percent. However, Hong Kong’s Hang Seng index rose 0.7 percent after heavy falls for Chinese technology stocks reversed.
Additional reporting by Tommy Stubbington
Unhedged — Markets, Finance, and Strong Opinion
Robert Armstrong dissects key market trends and discusses how Wall Street’s brightest minds respond to them. Sign up here to receive the newsletter straight to your inbox every weekday