Nasdaq closes down 5% in sharpest fall since 2020

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.

The regional Stoxx 600 share index added 1.7 per cent in early trading 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 2.3 per cent, while London’s FTSE 100 added 1.6 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 technology-focused Nasdaq Composite reversed earlier losses to close more than 3 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. The stock market reaction following Powell’s comments “was a reflection of relief”, she said.

In debt markets, the yield on the benchmark 10-year US Treasury rose 0.04 percentage points to 2.95 per cent, having climbed in the run-up to the Fed announcement before falling. Yields move inversely to bond prices.

In the UK, sterling fell 0.7 per cent against the dollar to $1.25 and 0.6 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 expect 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. She added investors should not expect the BoE to automatically follow Fed policy, calling the UK central bank “a canary in the coal mine in the sense that it tends to move faster than others in both directions”. In November, the BoE shocked analysts by holding interest rates at record lows, causing global bond prices to surge.

The yield on the 10-year UK gilt was unmoved at 1.97 per cent. The two-year gilt yield, which tracks monetary policy expectations, drifted 0.02 percentage points lower to 1.63 per cent.

In Hong Kong, which follows US monetary policy in order to maintain its currency’s dollar peg, the Hang Seng index rose 0.4 per cent, while in Australia the S&P/ASX 200 climbed 0.8 per cent.

In China, where markets reopened after a long weekend holiday, shares lagged the rest of the region as an independent reading on the country’s economy marked the worst contraction since the initial onset of the coronavirus pandemic.

The Caixin China services purchasing managers’ index reading of 36.2 was a substantially sharper fall in activity from the previous month, as businesses struggled to deal with disruption from the harsh lockdown of Shanghai, the country’s financial capital.

That helped push the CSI 300 index of Shanghai- and Shenzhen-listed stocks down as much as 0.7 per cent. The benchmark later pared early losses but was down 0.1 per cent in afternoon trading, despite promises from top officials over the long holiday of greater economic support measures.