Europe open: Banks pace the advance as investors digest hawkish Fed hike
European stocks edged higher in early trade after the Federal Reserve upped interest rates by 25 basis points, as anticipated, but struck a more hawkish tone than expected, signalling three hikes next year.
At 0850 GMT, the benchmark Stoxx Europe 600 index was up 0.3%, Germany’s DAX was 0.5% higher and France’s CAC 40 was up 0.6%. In London, the FTSE 100 was down 0.1% as investors eyed the latest rate announcement from the Bank of England amid expectations the bank rate will be kept at a historical low of 0.25% and the asset purchases target will be unchanged at £435bn.
Meanwhile, oil prices were in the black, with West Texas Intermediate up 0.2% at $51.16 a barrel and Brent crude up 0.7% to $54.27.
On Wednesday, the Fed raised the range of its main policy rate to between 0.50% and 0.75% and signalled that more interest rate increases were on the cards for next year than it had suggested at the meeting in September. Rate-setters in Washington DC were unanimous in their decision to tighten policy.
According to the newly-submitted 'dot-plot' graphs of interest rates projections from the Federal Reserve's board members and regional Fed presidents, the median expectation is for three quarter-point interest rate hikes in the following year, up from two previously.
A further three hikes were projected in 2018, followed by another three in 2019.
David Morrison, senior market strategist at SpreadCo, said: “The 25 basis point rate rise was expected. However, the consensus view (or hope) among investors was that the FOMC’s ‘dot plot’ would point to 50 basis points-worth of tightening in 2017. So there was some disappointment when the Committee coalesced around the likelihood of three 25 basis point hikes instead. This led to a surge in the dollar and a sharp sell-off in equities and precious metals.
“However, while the dollar is holding onto gains and precious metals are still under pressure, equities appear to be bouncing back. After all, it’s really neither here nor there whether the fed funds rate ends next year just below 1.25% or 1.50%. This is especially the case if the US can look forward to the stimulus of tax cuts, infrastructure spending and less regulation. The danger will come if bond yields shoot higher on fears of inflation taking off. This would be a disaster given the high levels of debt sitting at the base of the global economy.”
Banks led the advance on Thursday, with the Stoxx 600 sub-index for the sector up 1.9% on the Fed rate hike.
Elsewhere, British Gas owner Centrica pushed up after lifting its earnings outlook for the full-year.
Royal Dutch Shell edged higher as it said chief financial officer Simon Henry will retire after more than seven years in the role, to be succeeded by Jessica Uhl, who will take on the job with effect from 9 March.
On the downside, Swiss pharmaceutical manufacturer Lonza was under the cosh after announcing the acquisition of US capsule products maker Capsugel for $5.5bn in cash.
French utility EDF tumbled after it warned over its 2017 earnings.