European markets slump ahead of Federal Reserve minutes

Federal Reserve Chairman Jerome Powell. European markets were muted on Wednesday as investors focus on the latest insights into the Fed’s policy tightening. Photo: Tom Williams/CQ-Roll Call, Inc via Getty Images

European stocks were in the red on Wednesday as investors focus on fresh western sanctions against Russia over its invasion of Ukraine and the latest insights into the Federal Reserve’s policy tightening.

The FTSE 100 (^FTSE) lost ground after closing higher the previous session, falling 0.6%. France’s CAC (^FCHI) was 1.3% lower and the DAX (^GDAXI) lost 1.4% in Germany.

The pound (GBPUSD=X) dropped to a three-week low against the US dollar to $1,309 after the latest comments from Federal Reserve officials hinted at hawkish tightening of monetary policy. Sterling was up 0.1% at 83.30p against the euro (GBPEUR=X).

Western allies, including the United States, European Union and G7 countries are coordinating on a new round of embargoes against Russia, including a US ban on investment in the Kremlin and an EU ban on coal imports.

Meanwhile, European Council president Charles Michel said on Wednesday that the bloc will have to ban imports of Russian oil and gas “sooner or later” to put pressure on Moscow to withdraw from Ukraine.

“The UK market has taken its lead from the US, with negative trans-Atlantic sentiment leading the FTSE 100 down very slightly on open, although this hasn’t been as stark as was possible,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. “Further ups and downs are to be expected, with all eyes on the Federal Reserve’s next move.”

Read more: FTSE 100 shareholders in line to get a £114bn total cash return in 2022

Across the pond, US benchmarks dropped amid the prospect of a more aggressive stance from the Federal Reserve to curb soaring inflation.

Wall Street’s S&P 500 (^GSPC) dropped 57.52 points, or 1.3%, to 4525.12. The tech-heavy Nasdaq (^IXIC) crashed 2.6%, while the Dow Jones (^DJI) closed down 0.8% during the session.

It comes as government bond yields rose after Fed governor Lael Brainard said the central bank is strongly committed to taking action to cut inflation. Brainard hinted at methodical rate hikes and rapid reductions to the Fed’s $9tn (£6.9tn) asset portfolio in May.

The US 10-year Treasury yield jumped sharply in response to the comments, pushing above 2.5%, un-inverting back above the two-year yield in the process, which also touched 2.5%.

Fed chair Jerome Powell raised rates in the March meeting for the first time since 2018, by 25bps, although the decision wasn’t unanimous, with St. Louis Fed president James Bullard arguing for a 50bps rate hike.

The central bank is due to release minutes from its March 15-16 meeting later on Wednesday.

Michael Hewson, chief market analyst at CMC Markets, said: “Yesterday’s comments put into sharp relief the concerns investors have, that in looking to rein back inflation, the Fed might overplay its hand and tighten too aggressively and tip the economy into recession.

“Today’s Fed minutes should offer some additional insight into the thinking of all Fed policymakers into this part of the Feds normalization process.”

Read more: How economic sanctions work

Overseas markets edged lower as investors weighed a potential tightening of monetary policy in the US and the evolving crisis in Ukraine. The MSCI’s broadest index of Asia-Pacific (AAXJ) shares excluding Japan fell 1.8%.

Asian stocks were mixed overnight with the Nikkei (^N225) down 1.6% in Japan, while the Hang Seng (^HSI) edged 1.3% lower in Hong Kong and the Shanghai Composite (000001.SS) closed flat as markets in mainland China reopened after two days of public holidays.

Watch: How does inflation affect interest rates?

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