World shares mostly advanced on Thursday despite Wall Street closing lower following the Federal Reserve's interest rate hike decision for the first time in three years. According to Associated Press, the quarter of a percentage point increase brings the Fed's key rate to a target range of 3.75%-4.00% as it attempts to control U.S. inflation that's been stubbornly above its target. U.S. futures were higher with the S&P 500 futures climbing 0.8% and Dow Jones Industrial Average gaining 0.7%. In early European trading, Britain's FTSE 100 rose 0.5% to 10,739.72, France's CAC 40 advanced 0.3% to 8,163.52, while Germany's DAX climbed 0.6% to 25,694.84. The positive sentiment was driven by falling crude oil prices and stabilising bond markets, which provided relief to equity markets after the Fed's decision.
Technology stocks led the gains with Germany's DAX advancing 0.76% as investors assessed the outcome of state elections in northeastern Germany. According to The Economic Times, the pan-European STOXX 600 gained 0.56% to 638.98 points by 0710 GMT, after falling 0.6% last week. Projections indicated that the far-right Alternative for Germany (AfD) had emerged as the largest party in the region. Investors were also monitoring economic data from Sweden, where long-term inflation expectations among financial and business groups eased in September, according to Reuters reports. The technology sector strength was supported by gains in Nemetschek and ASML, with Nvidia rising 1.9% and Advanced Micro Devices climbing 4%.
The FTSE 350 household goods & home construction index rallied 7% and the construction and materials index gained 4.6% as rate-sensitive sectors drew comfort from a sharp drop in yields. According to Reuters, the rally was supported by strong results from Barratt Redrow and a sharp retreat in gilt yields. Short-dated British government bond yields headed for their biggest one-day drop since May 20, falling more sharply than elsewhere and reversing some of this month's rise caused by the escalation of the conflict in the Gulf. The 2-year gilt yield touched a low of 4.752% as oil prices eased from recent highs, providing significant relief to housing and construction stocks.
Travel stocks gained 0.86% with airline shares benefiting from lower fuel costs as oil prices extended their decline for a fourth consecutive session. According to The Economic Times, the decline in oil prices provided relief to investors concerned about the inflationary impact of higher energy costs. However, European energy stocks slipped 0.2% as oil prices remained above $100 a barrel with Saudi Arabia offering additional crude cargoes through Oman. The energy sector weakness contrasted with the broader market gains, reflecting mixed sentiment toward commodity-related investments. WTI crude oil futures were down more than 2% at $103.50 per barrel after hitting a fresh four-month high yesterday.
The Fed's so-called dot plot suggests one more hike this year, while money markets are pricing in a total of three hikes over the next 12 months. Following the Fed's announcements, the two-year U.S. Treasury yield rose to 4.71% early Thursday compared to around 4.67% late Tuesday, while the yield on the 10-year Treasury remained at near 5.00% at an elevated level. Fed Chair Kevin Warsh, who took over in May, highlighted persistent inflation concerns during his press conference, stating "The plain fact is that inflation is too high, and has been for too long." The 10-year Treasury yield traded back above 5% amid fears that the Fed may still be behind the curve on inflation even after Wednesday's hike.
Big banks slid after the decision, with Bank of America and Wells Fargo shares declining nearly 3% apiece on fears higher rates could slow lending growth and the economy. American Express and Goldman Sachs shares also declined almost 4%. Adding to economic pressures, U.S. diesel prices hit $6 per gallon on Friday for the first time amid ongoing supply constraints caused by the Ukraine and Iran wars. Additionally, crude oil prices are currently holding above $100 a barrel. However, Intel shares advanced 4%, helping to stem losses for the Nasdaq, on reports that it was in talks with South Korea memory giant SK Hynix to build semiconductors in the U.S. The market reaction suggests investors are taking the widely expected Fed decision in stride initially, but remain concerned about the economic implications of higher interest rates.
