European shares followed Wall Street higher after the US Federal Reserve announced its first 0.5 percentage point interest rate rise in more than 20 years but signalled it would hold back from even larger hikes.
The regional Stoxx 600 share index added 1 per cent on Thursday after the widely expected rate rise from the US central bank, which sparked a relief rally in equities as Fed chair Jay Powell appeared to rule out 0.75 percentage point hikes at upcoming meetings.
Germany’s Xetra Dax rose 1.7 per cent, while London’s FTSE 100 added 1.1 per cent.
Wall Street’s benchmark S&P 500 closed 3 per cent higher on Wednesday, its largest one-day gain since May 2020, while the tech-heavy Nasdaq Composite was 3.2 per cent higher.
“Investors came into the meeting fearful that the committee would be overly aggressive in tightening monetary policy,” said Clara Cheong, global market strategist at JPMorgan Asset Management.
US government bonds remained volatile, however, as fixed income traders focused on comments by Powell that signalled the future path of rate rises and inflation remained uncertain.
The yield benchmark 10-year US Treasury rose 0.05 percentage points to 2.97 per cent, having climbed in the run-up to the Fed announcement before falling. Bond yields move inversely to prices.
On Wednesday, Powell said a neutral monetary policy position, which neither speeds up nor slows the economy, was “not something we can identify with any precision.”
The Fed chair “sounded very determined to raise rates until he sees progress on inflation,” said Rose Ouahba, head of fixed income at Carmignac. “And did not give a sense of where the Fed needs to stop.”
The annual pace of consumer price increases in the US hit 8.5 per cent in March.
In the UK, sterling fell 0.6 per cent against the dollar to $1.25 and 0.5 per cent against the euro to just over €1.18.
The moves came ahead of an interest rate decision from the Bank of England, which is expected to raise its main borrowing cost by a quarter-point to 1 per cent, in its fourth consecutive increase.
Some analysts expect the BoE to signal a less aggressive stance in future, after governor Andrew Bailey said policymakers were “walking a very tight line” between tackling soaring inflation and avoiding a recession.
“I really don’t think we’re going to see much deviation from the hawkish path they have set,” said Sonal Desai, chief investment officer at Franklin Templeton’s fixed income group.
“They may give a bit of hope they don’t want to keep hiking rates too much if the economy is weak,” added Trevor Greetham, head of multi-asset at Royal London Asset Management. “But we are still in the early stages of tightening [monetary policy].” UK inflation hit 7 per cent in March as energy prices surged in response to Russia’s invasion of Ukraine.
The yield on the 10-year UK gilt was flat at 1.96 per cent. The two-year gilt yield, which tracks monetary policy expectations, drifted 0.02 percentage points lower to 1.63 per cent.
Asian equities missed out on the global rally after an independent survey indicated the Chinese economy had suffered its worst contraction since the initial onset of the coronavirus pandemic.
Hong Kong’s Hang Seng index closed 0.4 per cent lower, while mainland China’s CSI 300 index dipped 0.2 per cent. Japan’s Nikkei 225 closed down 0.1 per cent.
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