European stocks experienced a sharp decline on Thursday, heading for their largest percentage drop in five weeks, as investors pulled out of riskier assets, including equities and commodities, following the U.S. Federal Reserve’s signal of a slower pace of interest rate cuts in 2025.
The pan-European STOXX 600 index was down 1% by 0839 GMT, with all major subsectors falling.
Fed’s Hawkish Tone Sends Shockwaves
U.S. stocks had already plunged on Wednesday, as the Federal Reserve announced its expected rate cut, but Chair Jerome Powell’s remarks dampened investor sentiment. Powell indicated that further rate reductions would depend on significant progress in taming stubbornly high inflation, signaling a more cautious approach to easing borrowing costs in the near future.
The Fed’s announcement led to a sharp reaction in the markets, with U.S. stock indexes posting their biggest daily decline in months. Futures pointed to a mild rebound when U.S. markets opened on Thursday, but the damage was already done in Europe.
Matt Britzman, Senior Equity Analyst at Hargreaves Lansdown, commented, “Wall Street’s reaction underscores the Fed’s delicate balancing act as it tightens its outlook on easing, forcing markets to recalibrate their rate expectations.”
Britzman added, “Investors should see this as a healthy spot of profit-taking rather than an end to the party, after what’s been a fantastic run for markets since the U.S. election.”
Market-wide Selloff
The reaction to the Fed’s decision was felt across both U.S. and European bond markets, where government bond yields spiked. Prices for oil and base metals also dropped, weighed down by a stronger dollar.
In Europe, technology stocks, which are more sensitive to rate changes, were among the hardest hit. The sector was down 1.9% overall, as large-cap chip stocks suffered major losses following their U.S. counterparts. Companies like ASML, Infineon Technologies, and STMicroelectronics saw their shares fall by 3.0% to 3.6%.
A volatility gauge tracking euro zone stocks surged to its highest level in two weeks, reflecting the increased market uncertainty.
UK Market Reaction and BoE Decision
In the UK, the FTSE 100 dropped 0.9%, in line with the broader market selloff. Traders were awaiting the Bank of England’s (BoE) decision on interest rates, scheduled for 1200 GMT. The general consensus was that the BoE would keep rates on hold at 4.75% for the time being, with persistent inflationary pressures limiting any immediate rate cuts.
Analysts from UniCredit suggested that the Bank of England would likely maintain a gradual approach to easing, with only a 25-basis-point cut per quarter expected. However, the analysts noted that the BoE may need to accelerate rate cuts next year, especially as they anticipate a deterioration in the private-sector labour market in the early months of 2025.
Corporate News: SoftwareOne and Crayon Group
Amid the broader market decline, SoftwareOne Holding stood out, seeing a gain of 8.7% after announcing it would acquire Crayon Group, a Norwegian technology company, for approximately $1.34 billion. The deal, which was widely seen as a strategic move to expand SoftwareOne’s portfolio, boosted the Swiss company’s stock, even as Crayon’s shares fell by 6.5% following the announcement.
Conclusion
The Fed’s hawkish stance and the subsequent market recalibration are continuing to affect stock markets across the globe. European stocks are feeling the pressure, with declines across sectors, especially in technology. Investors will be watching the Bank of England’s decision and whether its actions align with expectations for a gradual rate-cutting approach in the coming months. Despite the broader market selloff, some companies like SoftwareOne are navigating these turbulent times with positive announcements and strategic growth.
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