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European stocks dive on trade war fears, before UK rate call

The BoE is widely expected to refrain from altering borrowing costs -- but could signal a hike for its next gathering in May as average UK wages growth catches up with the inflation rate.

Published: 22nd March 2018 05:47 PM  |   Last Updated: 22nd March 2018 05:47 PM   |  A+A-

By AFP

LONDON: Europe's major stock markets sank sharply on Thursday, mirroring Asia, as sentiment was rocked by fresh trade war fears with Donald Trump readying new sanctions on China.

In foreign exchange activity, the British pound held above $1.41 as dealers awaited the Bank of England's latest interest rate decision at 1200 GMT.

The BoE is widely expected to refrain from altering borrowing costs -- but could signal a hike for its next gathering in May as average UK wages growth catches up with the inflation rate.

"With investors awaiting both the Bank of England’s latest rate vote and the unveiling of Trump’s tariffs on Chinese imports the markets remained in a bloody mood this Thursday," said Spreadex analyst Connor Campbell.

Added to the picture, official data showed Thursday that British retail sales rebounded 0.8 percent in February from January, boosted by food and online purchases.

The dollar meanwhile struggled after the Federal Reserve lifted borrowing costs as expected to a decade high, and stuck to its target for more hikes this year.

After one of the most hotly anticipated meetings in recent months, the US central bank indicated just two more over the rest of the year, confounding forecasts of three more.

Jerome Powell, in his first news conference since taking the helm, said the move was in response to a strong economic outlook that had been helped by December's tax cuts, while improving jobs creation was lifting incomes and confidence.

'Aggressive rate tightening' -

In response, the dollar slid sharply on Wednesday against most other units and while the Fed also said it saw a more aggressive path of hikes over the next two years as the economy continues to strengthen, the US unit failed to bounce back.

"Powell delivered the rate hike markets expected, but a more hawkish tone hints heavily at an increasingly aggressive rate tightening cycle, if not this year then certainly in 2019," noted analyst Lee Wild at Interactive Investor.

The dovish short-term outlook for US borrowing costs provided optimism for Asian investors initially before a broad rally fizzled.

Higher interest rates tend to weigh on stock markets because they increase loan repayments and therefore tend to bite into the bottom line -- and reduce consumers' disposable incomes. At the same time however, they lift the rate of return on savings.

China trade row -

Trading floors remain edgy as it emerged Trump is expected to hit China over what Washington calls "theft" of US intellectual property.

The move would further strain tensions with Beijing after the White House unveiled controversial tariffs on imports of steel and aluminium, which sparked fury from world leaders.

China vowed to respond with "necessary measures to resolutely defend its legitimate rights and interests".

Oxford Economics chief Asia economist Louis Kuijs, said: "The key risk is that it does not end with this modest baseline scenario.

"More measures may follow, and tit-for-tat responses could lead to escalation. Collateral damage in other economies will be significant and could further complicate the trade friction."



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