European stock markets slumped in early trade on Thursday, taking the cue from a very soft Asian session, as markets digested the Federal Reserve’s statement last night. US stock markets reversed earlier gains in another seesaw day on Wall Street. The Dow Jones fell 130pts, having been up more than 500pts at one point, as Fed chair Jay Powell signalled the US central bank could be open to more rate hikes this year than it has previously guided. The S&P 500 was down 0.15% and the Nasdaq managed to end flat, though almost 500pts from its intra-day high. 

The FTSE 100 scrubbed early losses, bouncing off 7,380 to around 7,485, slightly higher for the session. Losses across European bourses were steeper, 1% for the DAX, CAC and Stoxx 50. It was a very weak handover from Asia: Japan’s Nikkei and Korea’s Kospi fell more than 3% overnight, while Hong Kong was down over 2%. 

Rates rose post-Fed, with sharp belly steepening taking the US 2yr rate above 1.2%, the highest in two years, and 5s to 1.7%, also the highest since early 2020. The yield on the 10yr note rose close to 1.87%, near its recent high. Rising yields weighed on gold, which retreated to long-term trend support at $1,810, having traded above $1,850 earlier on Wednesday. The dollar was bid strongly on the news, sending DXY towards the November peak, the highest it’s traded since Jul 2020. Dollar remains on front foot this morning with GBPUSD sinking to a one-month low and EURUSD at 1.12, threatening the Nov low.

The Fed gave the green light to lifting rates in March but chose to keep on with asset purchases until them, rather than ending them sooner. Quantitative tightening – reducing the balance sheet – will come some time later. The hawkishness came from Jay Powell in the press conference. He stressed that the economy and labour market are in much better shape than in 2015, the last hiking cycle. 

Powell dropped some remarks that can only lead us to think the Fed is minded to raise rates more aggressively than the dots and markets had thought. “I think there’s quite a bit of room to raise interest rates without threatening the labour market,” he said. Powell didn’t rule out hiking every meeting, pointing to as many as seven 25bps hikes this year.  “You have seen that our communication channel with the markets is working; markets are now pricing in a number of rate increases,” he added. The risks are skewed to the Fed doing more than 4 hikes this year. The problem for the market is that there is still a lot of uncertainty: 4 vs 7/8 hikes is still the spread so there is a lot of space in that to get it wrong and for markets to misfire…which means volatility. The Fed will be hoping that inflation runs off in Q2, allowing it to say the hikes are working and ease back from doing much more, however if demand-led price growth sticks around it’s got a lot of catching up to do and 7 hikes could seem light. Market ructions over the last couple of weeks reflect this already. Do things settle down now until March? Hard to say: the market took Powell’s ‘wait-and-see’ optionality as hawkish, but that could be wrong. I feel the lack of clarity and consensus over what the Fed is going to do means more volatility for the time being.

Shares in Tesla fell in after-hours trading after the company warned that supply chain trouble would negatively impact performance in 2022. Tesla has so far been pretty good at avoiding chip shortages and other supply problems; net profit rose to a record $2.3bn. Elon Musk also said he’d be surprised if they didn’t achieve full self-driving safer than a human this year…we shall see. 

Elsewhere, Diageo reported operating profit rose 22.5% to £2.7 billion in the second half of last year, with margins improving by 190bps and reported net sales rising 15.8% to £8bn. Management said growth reflected ‘continued recovery in the on-trade, resilient consumer demand in the off-trade and market share gains’. The pandemic has been good for booze, and exiting it even better. Management saying ‘premiumisation’ strategy is driving growth in profits. Dividend +5%, accelerating buybacks. Shares rose a touch in early trade but still –10% YTD. 

3i Group said it had increased NAV per share to 1,235 pence despite the negative translation effect of sterling strengthening in the quarter. The company reported a total return of 32.6% for the nine months to 31 December 2021, noting good performance across both investment portfolios. 

St. James’s Place reported gross inflows of £4.69bn in the fourth quarter, up from £4bn in the year-ago period, with net inflows rising to £2.91bn from £2.29bn. Intermediate Capital shares rose as the company delivered its Q3 trading update, noting fee-earning AUM growth of 30% in last twelve months, with positive momentum underpinning a confident outlook. 

On the FTSE 250, Dr Martens shares tumbled 12% on its Q3 trading update which showed declining sales growth. Q3 Group revenue was in line with expectations at £307.0m, up 11% year on year. Growth slowed as it gave greater priority to the higher margin direct-to-consumer segment. Wholesale volumes declined 14%, whilst DTC grew 33%. 

EasyJet shares rose as it reported its Q1 loss halved from the year before and bookings had jumped since the government’s decision to remove all travel testing requirements, albeit omicron was impacting bookings in the short term. The company said Q4’22 on sale capacity is unchanged, remaining at near 2019 levels. 

Today sees Apple, Caterpillar, Chevron and Mondelez report earnings on Wall Street. Data dump from the US covering first look at Q4 GDP, durable goods orders, pending home sales and weekly unemployment claims.