(Bloomberg) — European stocks mirrored losses in Asia and the US session after a hawkish pivot by the Federal Reserve jolted markets. The yen slid as the Bank of Japan left borrowing costs unchanged.
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The Stoxx 600 dropped 1.2% as a gauge of Asian equities fell by an even bigger margin. US stock futures pointed toward a stronger open following the S&P 500’s biggest lost since 2001 for a scheduled Fed decision day.
The yen weakened past yet another milestone after comments by BOJ Governor Kazuo Ueda cast doubt on whether the bank could hike interest rates in January. The currency depreciated as much as 1.3%, breaching 156 versus the dollar.
The turbulence followed after the Fed scaled back the number of cuts it sees in 2025 to two and Chair Jerome Powell said future easing would require fresh progress on inflation, prompting sharp rises in the dollar and Treasury yields. The greenback steadied on Thursday, while longer-dated Treasuries extended losses.
“Equities were less prepared for this outcome, which might explain the severity of their response,” said Florian Ielpo, head of macro research at Lombard Odier Investment Managers. Still, the “hawkish cut implies that profits could be stronger than anticipated in the near term, a factor that markets may need to reassess,” he said.
Money markets are pricing in fewer than two quarter-point reductions for the entirety of 2025, even less than what was implied in the Fed’s so-called dot plot on Wednesday. In the options market linked to the Secured Overnight Financing Rate, one large block trade placed Wednesday afternoon even stands to benefit from the start of another hiking cycle next year.
Even so, Thursday’s recovery in US stock futures suggested that the initial reaction to the Fed could’ve been overdone, with analysts and investors pointing toward the strength of the US economy for further equity gains.
“What we have seen is a little cold water poured on what is otherwise a decent economy,” John Bilton, JPMorgan Asset Management’s head of global multi-asset strategy, told Bloomberg TV. “I am constructive about next year. If I’m a bull, I have got to love a healthy pullback.”
European government bonds tumbled, catching up with Wednesday’s aggressive selloff in US Treasuries. The yield on UK 10-year notes jumped as much as nine basis points to 4.65%, the highest levels since October 2023, before the Bank of England sets policy later today.
Swaps traders see almost no chance of BOE policymakers following in the Fed’s footsteps with a cut, with less than two quarter-point reductions priced in for 2025.
