European shares set to follow Wall Street higher after Fed rate rise

European shares were set to follow Wall Street higher after the US Federal Reserve announced its first 0.5 percentage point interest rate rise in more than 20 years, while Chinese stocks edged down in the wake of a sharp contraction in the country’s services sector.

Futures tipped the Euro Stoxx 50 to climb 2.3 per cent on Thursday after the widely expected rate rise from the US central bank. The decision was followed by comments from Fed chair Jay Powell that appeared to rule out any move to raise rates by 0.75 percentage points at upcoming meetings.

Powell signalled that the Fed’s policymaking committee expected to implement 0.5 percentage point increases at its next two meetings but was not “actively considering” a more aggressive 0.75 percentage point increase. But he added that “if higher rates are required, then we won’t hesitate to deliver them”.

That message sent Wall Street’s benchmark S&P 500 up 3 per cent on Wednesday, its largest one-day gain since May 2020, while the technology-focused Nasdaq Composite reversed earlier losses to close more than 3 per cent higher.

In debt markets, the yield on the benchmark 10-year US Treasury fell 0.04 percentage points to 2.92 per cent, having climbed in the run-up to the announcement. Yields fall as bond prices rise.

“Investors came into the meeting fearful that the committee would be overly aggressive in tightening monetary policy,” said Clara Cheong, global market strategist at JPMorgan Asset Management. The rally that followed Powell ruling out a larger rate rise “was a reflection of relief”, she said.

The response from Asian markets was mixed. In Hong Kong, which follows US monetary policy in order to maintain its currency’s dollar peg, the Hang Seng index rose 1.2 per cent, while in Australia the S&P/ASX 200 climbed 0.6 per cent.

But in China, where markets reopened after a long weekend holiday, shares fell as an independent reading on the country’s economy marked the worst contraction since the initial onset of the coronavirus pandemic.

The Caixin China services purchasing managers’ index reading of 36.2 marked a substantially sharper fall in activity from the previous month, as businesses struggled to deal with disruption from the harsh lockdown of Shanghai, the country’s financial capital.

That helped push the benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks down 0.5 per cent, despite promises from top officials over the long holiday of greater economic support measures.

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