European stocks slumped by more than 2% at midday on Thursday as inflationary fears gripped the market a day after the US Federal Reserve raised interest rates by an aggressive 75 basis points and the Bank of England also lifted its benchmark rate in a bid to combat spiralling inflation.
US stock index futures fell sharply, indicating that Wednesday’s Wall Street rally after the Fed’s decision to hike rates by their largest margin in three decades would be short lived. Nasdaq 100 futures had plunged by almost 3%.
The Fed on Wednesday raised its target interest rate by 75 basis points, its biggest rate hike since 1994, and projected a slowing economy and rising unemployment in the months to come. In London, the BoE lifted its base rate to 1.25% from 1%.
“Relief has rippled through financial markets that the Federal Reserve hasn’t dropped the ball when it comes to trying to tackle inflation but there are still concerns that central banks are playing a tough game of catch up and could overshoot in their efforts to rein it in,” said Hargreaves Lansdown analyst Susannah Streeter.
“There is a growing expectation that this hike will be followed by another 0.75% rise in an attempt to front load efforts and bring down demand more quickly, even though this is expected to dent growth and see unemployment rise.”
“Risks that there will be an uncomfortably hard landing for the US economy remain but it seems policymakers feel this may be a price to pay given the inflation shock the world is facing.”
In equity news, retail shares were out of favour after UK online fashion retailer ASOS slumped on the back of a warning that surging inflationary pressures were affecting shopping behaviour.
German rival Zalando dropped 10% and JD Sports Fashion 8%.
Shares in THG dived 18% after Belerion Capital said it no longer planned to make an offer for the online retailer.
