A 2% to 3% drop in the main US indices last night was the market waking up to the fact it had been too complacent about interest rates and inflation.
Russ Mould, investment director at AJ Bell, said:“January’s global stock market rally represented a shift in investor sentiment, with many people believing that central banks, particularly the Federal Reserve, were close to the end of the interest rate rise cycle. With signs of inflation easing, investors thought the cost of borrowing wouldn’t get too much more expensive and so risk appetite was returning for equities, cryptocurrencies and more.
“A bucket of cold water was poured on the market last week when two Federal Reserve members indicated they would support a 50 basis-point hike in the next US interest rate decision. In essence, a larger hike than some expected, and a signal that the Fed would be nowhere near the end of its rate hike cycle, let alone the prospect of seeing rates come down later in the year.
“With US markets closed on Monday for a holiday, investors had three days over the extended weekend to let the prospect of further rate hikes sink in. The reaction was to start taking some money off the table as markets reopened on Tuesday. Contagion spread across Asia and Europe and now we’ve got investors wondering if they should be more cautious again.
“That’s reflected by what’s in vogue on the FTSE today. It’s no coincidence that pharmaceuticals, tobacco and consumer goods companies outperformed the market – all defensive names whose goods and services are in demand no matter the state of the economy.
“The risk-off mentality explains why miners were among the biggest fallers. An assumption that rates could continue to rise theoretically raises the risk of more damage to the economy, and commodity producers’ fortunes are highly sensitive to economic activity.”