Global markets are set to end the week lower following the Fed’s hawkish rate cut on Wednesday, which sent government bond yields soaring, draining liquidities.
Global stock markets ended Thursday in a sea of red following the Fed’s hawkish pivot, leading to a broad-based selloff not seen since August.
The souring sentiment caused major benchmarks on both sides of the Atlantic to tumble, dimming hopes for a Santa Rally.
Yields on major benchmark government bonds in the Eurozone rose, mirroring their US counterparts, as the Fed projected fewer rate cuts in 2025.
The German 10-year government bond yield climbed 6 basis points to 2.3%, the highest in nearly a month.
The US 10-year government bond yield surged to 4.56%, the highest since May, rising by 17 basis points over the past two days.
The bond market turmoil continued to weigh on equity markets, with all regional stocks likely ending the week lower, just days before Christmas.
Europe
Major European benchmarks all recorded weekly losses, with the pan-European Stoxx 600 index falling 2.32%, the DAX declining 2.14%, the CAC 40 slipping by 1.55%, and the UK’s FTSE 100 dropping 2.35%.
All sectors were in negative territory, with energy and industrial stocks leading the week’s losses. The two sectors continued to underperform due to falling oil and metal prices.
Over the past five trading days, shares of Shell and BP slumped more than 4%, while Rio Tinto and Glencore’s stocks fell nearly 9%, particularly weighing on British stock markets.
Meanwhile, technology stocks declined following the Fed’s hawkish rate cut, with ASML down 3.69% and SAP falling 1.35% on Thursday.
On the economic front, December’s flash manufacturing Purchasing Managers’ Index (PMI) data came in lower than expected in Germany and France, indicating that the sector’s downturn deepened.
On a brighter note, services PMIs in Germany and the eurozone returned to growth this month, according to S&P Global’s estimates.
However, this expansion was insufficient to offset the broader economic challenges.
In the UK, the Bank of England kept interest rates on hold at 4.75%, as widely expected.
However, Governor Andrew Bailey stated: “With heightened uncertainty in the economy, we cannot commit to when or by how much we will cut rates in the coming year,” while reiterating a gradual approach to future rate cuts.
The dovish tone contrasted sharply with the Fed’s hawkish stance, causing the British pound to weaken significantly against the dollar, hitting its lowest level since May.
Wall Street
The US stock markets experienced a significant retreat this week following the Fed’s hawkish rate cut.
Over the past five trading days, the Dow Jones Industrial Average fell 3.39%, the S&P 500 slid 3.04%, and the Nasdaq Composite slumped 2.8%. The small cap, Russel 2000, tumbled 5.5% due to expectations of a slow pace of rate cuts.
In the S&P 500, all eleven sectors ended in negative territory, with the interest-rate-sensitive real estate sector leading losses, down 6.84% for the week.
The energy sector followed, dropping 6.76%, while industrials fell 5.67% compared to last week.
Most of the “Magnificent Seven” stocks declined on a weekly basis, with Nvidia down 4.85% and Meta Platforms falling 5.58%. Tesla, however, bucked the trend, rising 4.32% week-on-week.
The Fed cut interest rates by 25 basis points, bringing the total reduction this year to one full percentage point.
However, its dot plot projected just two cuts next year, down from four in its previous forecast. The final third-quarter GDP growth came in at an annualised pace of 3.1%, higher than the first two estimates.
This data further evidenced a resilient economy, reinforcing expectations of a gradual easing cycle by the Fed.
Asia
The Bank of Japan (BOJ) kept its policy rate unchanged this week and provided little guidance on future rate decisions.
Markets interpreted this as dovish, reducing the likelihood of a January rate hike. The Japanese yen weakened sharply against the dollar, reaching its lowest level since July.
In China, the People’s Bank of China (PBOC) kept the 1-year and 5-year Loan Prime Rates unchanged, as expected.
The Fed’s hawkish pivot may have influenced the PBOC to slow its pace of rate cuts, helping to stabilise the tumbling yuan. The Chinese yuan weakened against the dollar to its lowest level since November 2023 on Thursday.
Elsewhere, New Zealand’s economy slipped into a technical recession once again. Third-quarter GDP contracted by 1% compared to the previous quarter, following a 1.1% contraction in Q2.
Two consecutive quarters of negative economic growth constitute a technical recession.
