Selloff deepens after Fed warning, BOE rate hike

Stocks and bonds fall as Jerome Powell’s warning that the Federal Reserve would raise interest rates more than previously anticipated sapped risk appetite. The dollar gained.

Futures on the S&P 500 fall 1% in the wake of Wednesday’s 2.5% drop. The selloff spread to Europe and Asia, where China’s affirmation of its Covid-Zero stance dashed hopes of a reopening. Lumen Technologies Inc., Peloton Interactive Inc., Moderna Inc. and Qualcomm Inc. tumbled in premarket trading, while Etsy Inc. and EBay Inc. rise.

The Bank of England (BOE) followed the Fed’s 75 basis-point increase with an equivalent hike on Thursday, but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a two-year recession. The pound fell 1.8% to $1.1183.

Powell had disappointed traders betting on a pivot as the US economy remains resilient to stubbornly high inflation. The latest jobless claims held near a historic low, but the odds of a US recession are rising and the chances it will be mild are falling.

“Every time the market gets a little bit of dovish hope, it gets smacked on the nose with a rolled up newspaper,” said Scott Rundell, chief investment officer at Mutual Ltd. “There’s a lot of volatility still ahead.”

Global bonds tumbled on Thursday in the wake of the Fed meeting. Two-year Treasury yields rose to 4.7%, but they’re still below the 5.06% peak in yields priced into Fed funds futures. Two-year gilt yields also falls.

“Factoring in the bond market’s assessment, markets are becoming increasingly convinced that the path toward the terminal rate will include a recession,” said Quincy Krosby, chief global strategist at LPL Financial.

Separately, European Central Bank President Christine Lagarde warned on Thursday that a “mild recession” is possible but that it wouldn’t be sufficient in itself to stem soaring prices.

Norway’s krone fell after its central bank delivered the smallest increase in its benchmark rate since June.

Wheat prices fell after Russia agreed to resume a deal allowing safe passage of Ukrainian crop exports. Oil dropped after Powell’s comments on interest rates overshadowed tightening supply.

Elsewhere, Pakistan’s former premier Imran Khan was injured and moved to a safe location after shots were fired at his rally in eastern Punjab province, his spokesman said.

Futures on the S&P 500 falls 0.7% as of 7:15 am New York time and futures on the Nasdaq 100 also drop 0.9%.

While futures on the Dow Jones Industrial Average falls 0.5%, the Stoxx Europe 600 sinks 1.2% and the MSCI World index also declines 1.6%.

The Bloomberg Dollar Spot Index rises 0.6% and the euro falls 0.8% to $0.9744.

While the British pound slumps by 1.1% to $1.1261, the Japanese yen falls 0.2% to 148.21 per dollar.

While bitcoin drops 0.5% to $20,080.87, ether rises 1% to $1,526.14.

—Bloomberg