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European stock markets suffered their worst day in nine months as sell-offs triggered by fading hopes for a rapid cut in U.S. interest rates spread around the world.
Indexes in Europe and Asia fell sharply, following sharp declines on Wall Street on Tuesday after strong U.S. retail sales figures suggested the Federal Reserve could cut rates this year by less than what we thought before.
The region-wide Stoxx Europe 600 index fell 1.5 percent, its biggest one-day drop since last July. London’s FTSE 100 index fell 1.8 percent, also its worst day in nine months, with declines in Europe driven mainly by energy groups, banks and mining companies, which are over-represented in the index focused on raw materials.
Wall Street’s benchmark index, the S&P 500, was down 0.1% in early afternoon trading in New York, as was the tech-heavy Nasdaq Composite index, narrowly extending the strong declines compared to the previous trading session. The S&P 500 recorded its worst two-day streak on Friday and Monday since the regional banking crisis of March 2023.
Hong Kong’s Hang Seng, South Korea’s Kospi and Japan’s Topix all fell more than 2 percent, while China’s CSI 300 fell 1.1 percent.
“It’s basically forcing the equity market to wake up to the reality of fewer Fed cuts,” said Emmanuel Cau, a strategist at Barclays.
Expectations of a smaller cut in U.S. rates also triggered a fall in emerging market currencies against the dollar, prompting Asian central banks to intervene, including Indonesia and South Korea.
Investors said the Iranian attack on Israel this weekend added to concerns that stock markets had rebounded too far and too quickly this year.
“The market is looking for an excuse to take a breather and we have the perfect storm,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers.
“Geopolitical risks are driving commodity prices higher, which combines with existing inflation and interest rate concerns. The performance since the start of the year was just too stellar for it to stay that way,” he added.
As changing interest rate expectations affected foreign exchange markets, the Indonesian rupiah slipped 2 percent to Rp 16,176 against the dollar, its lowest point in four years.
Bank Indonesia Governor Perry Warjiyo said Tuesday the central bank had intervened to support the rupiah, which had fallen about 5 percent this year and was one of Asia’s worst-performing currencies .
The Indian rupee fell 0.2 percent to a record low of 83.64 rupees against the dollar and the Malaysian ringgit was trading near a 26-year low, down 0.3 percent. to RM4.79, a day after Malaysia’s central bank said it would “manage risks arising from increased financial market volatility.”
The Korean won fell 0.9 percent to 1,400 won, a 17-month low that led the Ministry of Finance and the Bank of Korea to say in a joint statement on Tuesday that they were “closely monitoring movements forex as well as supply and demand with particular caution.
The retreat from assets and currencies perceived as relatively risky follows figures showing growth in China was stronger than expected in the first quarter.
However, disappointments in industrial production and retail sales raised some concerns about the country’s recovery at a time when the strength of the US economy dominated global markets.
Inflationary risks will be at the heart of discussions among policymakers at the spring meetings of the World Bank and the IMF in Washington this week, particularly after the sharp rise in commodity prices in recent weeks, amid fears of supply disruption caused by the conflict between Israel and Iran.
Traders had already scaled back their bets on a rate cut by the Fed last week after official data showed a 3.5 percent rise in consumer prices for the year through March, up from 3.2 percent in February and above expectations.
Investors now expect one or two Fed rate cuts this year, from the current 23-year high of 5.25 to 5.5%, compared to at least six expectations in early 2024.
