Europe open: Shares slump on hawkish Fed; BoE, ECB rate hikes on way

European markets fell sharply at the open on Thursday as hawkish comments from the US Federal Reserve and expected rate increases from the Bank of England and the European Central Bank hit investor sentiment.

The pan-regional Stoxx 600 index was down 1.12% at 0840 GMT. The Fed on Wednesday raised interest rates by half a percentage point after delivering four consecutive 75 bps hikes, but signalled more increases in borrowing costs by the end of 2023.

"I wish there were a completely painless way to restore price stability," said the central bank’s chair Jerome Powell. "There isn't, and this is the best we can do."

US and Asian markets both fell on the news and Powell’s downbeat remarks. To add to the gloom, a China data dump for November showed worsening conditions due to strict Covid 19-related curbs.

"Safe to say, investors simply didn't see that coming. Two months of better-than-expected inflation data were enough to convince them that the Fed would not only ease off the brake but signal it would do so more in the coming months," Oanda analyst Craig Erlam.

"The question now becomes whether other central banks will take a similarly hawkish position against the markets and ruin any hope of a Santa rally this year. Of course, that very much depends on the individual circumstances. Take the BoE for example, it has already been pushing back against market expectations but in a very different way, with the message from the MPC being that it doesn't expect to tighten as aggressively as the economy falters."

"The ECB faces other challenges, most notably the fact that inflation is still 10% and it was very late to the party when it comes to raising interest rates. At the same time, the bloc faces a period of huge economic and energy uncertainty and probably recession. The central bank is expected to slow the pace of tightening today following two consecutive 75 basis point hikes but the economic projections are what will likely get the most attention as traders try to determine just how far the central bank plans to push rates."

In equity news, shares in fashion chain H&M fell despite a better than expected fourth quarter.

Reporting by Frank Prenesti for Sharecast.com