London (Reuters): World equity markets slumped on Thursday after the US Federal Reserve dashed investor hopes of a more dovish policy outlook even as signs grow that global economic growth is stuttering.
Jitters over the Fed’s move to largely keep guidance for additional hikes over the next two years spread from Asia to Europe, where major indexes fell to their lowest in two years and investors headed for the relative safety of government debt.
European shares fell 1.2%, with bourses in Germany, Britain and France all hitting their lowest since December 2016.
MSCI’s global equity index fell to its lowest since May 2017, shedding 0.4% as it headed for a fifth straight day of losses.
The Fed raised key overnight lending rate rates by 0.25% point as expected to a range of 2.25% to 2.50%.
It said “some further” rate hikes would be necessary in the year ahead, with policymakers projecting two rises on average next year instead of the three predicted in September, a change largely in line with expectations.
But that minor revision could not soothe market fears over a further US economic slowdown on the back of trade tensions with China, a waning boost from tax cuts and tightening monetary conditions for companies.
Oil prices fell more than 3%, erasing most of their gains from the day before and heading back towards their lowest levels for more than a year amid worries about oversupply and the outlook for the global economy.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan had earlier dropped 1% and Japan’s Topix joined Shanghai and Hong Kong’s Hang Seng in bear market territory, defined as down more than 20% from recent high.The concerns in equity markets saw investors flock to the safety of government bonds.
German 10-year government bond yields fell to their lowest in nearly seven months, and other high grade euro zone bond yields also fell.
The 10-year US Treasuries yield had earlier fallen as low as 2.750%, a level last seen in early April.
US junk bonds sold off sharply, with their ETFs falling 0.9%, the biggest decline since March 1.
A rise in short-term interest rates and a fall in the long-date yield rekindled worries of an inversion in the yield curve, where shorter-debt yields become higher than longer-term ones.
Historically, an inversion between short-yields, such as three-month and two-year yields, and 10-year yields has been seen as a fairly reliable indicator of a recession down the road.The two-year US yield stood at 2.656%, just 0.097% less than the 10-year yield.The dollar fell against major currencies, losing ground after perceptions the Fed was more hawkish than anticipated.
The dollar fell 0.4% against its rivals to 96.68 and within a whisker of a 9-day low of 96.554 hit in the previous session.
The euro gained 0.5% to $1.1429, slightly off a high of $1.14395 hit before the Fed’s policy announcement.