Europe close: Stocks hit three-week low after FOMC meeting

European stocks dropped to a three-week low on Thursday as hawkish comments from the Federal Reserve encouraged investors to take profits with global markets trading at or close to record highs.

All major equity indices across the continent fell by at least 1.1%, leading to a 1.5% drop in the pan-European Stoxx 600 index to 506.66 – its lowest close since 27 November.

Wall Street's major benchmarks dropped sharply on Wednesday evening – with the Dow sinking more than 1,100 points for its tenth straight daily loss – after the Fed scaled back its projections for interest-rate cuts in 2025. The US central bank suggested that monetary policy may only be eased twice more next year, compared with current market expectations for four more cuts.

Chris Beauchamp, chief market analyst at IG, labelled Thursday's equity sell-off in Europe was an "unseasonal rout".

“The shockwaves from last night’s ‘hawkish cut’ by the Federal Reserve continue to reverberate. Investors had hoped for an eventful meeting, but the FOMC’s shift to a more cautious outlook caught the market napping, and the resulting sell-off was as quick as it was ugly," Beauchamp said.

"Unsurprisingly, European markets have been unable to recover their footing today, unlike the US, where the selling has stopped for now.”

In other central bank news, Sweden's Riksbank reduced interest rates to their lowest level in almost two years on Thursday and signalled that another cut could be on the cards early next year. The key policy rate was cut by 25 basis points to 2.5%, in line with economists' forecasts.

Meanwhile, the Bank of England held rates steady at 4.75%, in a move widely expected following a recent uptick in inflation. In its last meeting of the year, the Monetary Policy Committee voted by a majority of six to three to leave the cost of borrowing unchanged.

In other news, German consumer sentiment looked set to improve in January 2025 after picking up at the tail end of 2024, according to the GfK consumer survey. The forward-looking consumer confidence index increased to -21.3 in January, up from a revised -23.1 the month before. While this was above the consensus forecast of -22.5, the consumer climate "remains at a very low level", according to Rolf Bürkl, consumer expert at NIM.

Market movers

UK water companies Severn Trent and Pennon gained after the industry regulator allowed a 36% rise in prices over the next five years for Britain’s long-suffering customers.

Also in London, Serco rallied as it said underlying operating profit rose 9% on the year to £270m in 2024 and upgraded its cash and net debt guidance.

Telecom Italia was a heavy faller, dropping 7% after receiving a €700m joint offer from the Italian government and Retelit for its wholesale unit Sparkle.