Wave of selling as BoE follows Fed with 75 bps rate hike

LONDON/SYDNEY, Nov 3 (Reuters) – World shares tumbled and the dollar and bond yields jumped on Thursday after the U.S. Federal Reserve shifted the outlook on its tightening from short and sharp to long and high, and the Bank of England delivered its biggest rate rise in decades.

Confirmation that the BoE had matched the Fed with a three-quarter point hike left European shares (.STOXX) down over 1.6% and did little to help sterling or other major currencies as the dollar (.DXY) went on its biggest tear since September. /FRX

The BoE’s hike, which came barely a month after government spending plans – since abandoned – triggered widespread turmoil in UK markets, was its biggest since 1989 and comes as it battles the highest inflation for 40 years.

“This is coordinated campaign from most of the main central banks now,” said Close Brothers Asset Management Chief Investment Officer Robert Alster.

“They have all agreed this is the way to defeat inflation,” he added, saying it meant more downward pressure on recession-threatened economies.

Investors had initially been cheered that the U.S. Fed on Wednesday at least opened the door to a slowdown in the pace of hikes after raising interest rates 75 basis points to 3.75-4.0%, by noting that monetary policy acted with a lag.

But Fed Chair Jerome Powell soured the mood by saying it was “very premature” to think about pausing and that the peak for rates would likely be higher than previously expected.

Futures are now split on whether the Fed will move by 50 or 75 basis points in December, and nudged up the top for rates to 5.0-5.25% likely by May. They also imply little chance of a rate cut until December 2023.

“The Fed is now more comfortable with taking smaller rate increases for a longer period than delivering larger increases now,” said Brian Daingerfield, an analyst at NatWest Markets. “The tightening cycle is officially now a marathon, not a sprint.”

All this was not what the equity markets wanted to hear.

Wall Street had fallen sharply after Powell’s comments and S&P 500, Dow and Nasdaq futures , pointed to another 1% drop when markets reopen..

Asian markets had slumped 1.6% overnight too as another set of soft Chinese PMI numbers added to the gloom.

Reuters Graphics

BoE TAKES THE STAGE

Norway had also raised rates earlier in the day but the Bank of England remained at centre stage as it held a news conference following its meeting.

The market had been fully priced for the 75-basis-point hike. It had been the biggest in 33 years apart from a failed attempt to support the pound on “Black Wednesday” in 1992, and lifted the BoE’s current rate to 3.0%.

Stuart Edwards, a fund Manager at Invesco, said: “I’m sure that (BoE) Governor (Andrew) Bailey will also reiterate the MPC’s commitment to fighting inflation.”

Edwards’ interest was also on the Bank’s new forecasts that inflation will hit around 11% in the coming months and that Britain has already entered a recession that could potentially last two years, longer than during the 2008-09 financial crisis.

“That may not influence the immediate path of rates,” Edwards said. “But it could impact where this hiking cycle tops out. That’s important for bond investors.”

That gloomy outlook put more pressure on the pound, which tumbled 1.7% to under $1.12 after the forecasts , and from a peak of $1.1564 overnight.

Two-year UK Gilt yields also popped back over 3%. U.S. Treasury yields were nearly at 4.73% as the curve “bear flattened”, with the spread to 10-year notes near its most inverted since the turn of the century.

UK corporate borrowing costs jumped on spending concerns

After the BoE, attention will move to the U.S. ISM survey of services later on Thursday and a payrolls report on Friday where any upside surprise will likely reinforce the Fed’s hawkish outlook.

The U.S. dollar was broadly bid after Powell’s hawkish take and found fresh momentum in Europe, leaving the dollar index at 112.860 following an overnight bounce from a 110.400 low.

The euro was knocked back to $0.9755 , having toppled from a high of $0.9976 overnight. The dollar also raced to 148.24 yen , having troughed at 145.68 on Wednesday.

The bounce in the dollar and yields was a drag for gold, which was stuck at $1,637 an ounce after being as high as $1,669 at one stage overnight.

Oil prices also did not like the dollar rally, with Brent down 95 cents at $95.23 a barrel, while U.S. crude fell just over a dollar to $88.93.

In good news for bread lovers, wheat futures plummeted overnight after Russia said it would resume its participation in a deal to export grain from war-torn Ukraine.

Additional reporting by Wayne Cole in Sydney, editing by Mark Heinrich

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