Asian Stocks Tumble as Fed’s Latest Rate Hike Triggers Market Fear

A man walks past an electronic board showing the numbers on the Tokyo Stock Exchange, along a street in Tokyo on Dec. 7, 2022. Yuichi Yamazaki/AFP via Getty Images

Stock markets in Asia tumbled on Dec. 16 as investors anticipated that higher interest rates would persist following the latest rate hikes by the U.S. Federal Reserve and other central banks.

The Fed raised its interest rate by 50 basis points on Dec. 14, prompting central banks in Europe, Britain, Switzerland, Denmark, Norway, Mexico, and Taiwan to follow suit. The banks said the hikes were necessary to tame inflation.

But the rate hikes have caused Asian stocks to decline. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.8 percent and, for the week, was down 2.3 percent. Global stock prices are down 1.2 percent this week.

Japan’s Nikkei fell 1.9 percent. The Bank of Japan (BOJ) stated that the Nikkei 225 had declined in line with stock prices in the United States and Europe but that the degree of decline had been “comparatively small in Japan.”

“The degree of decline had been comparatively small in Japan, reflecting market attention on such factors as the undervaluation of Japanese stock prices relative to those in the United States and the yen’s depreciation,” BOJ said in a statement.

The S&P 500 had its biggest percentage drop in over a month as it fell 2.5 percent overnight on Wall Street. S&P 500 futures were flat, while European futures were up 0.3 percent. India’s Sensex fell 0.75 percent.

The European Central Bank (ECB) made a 50 basis point hike and hinted at further rate hikes. The Bank of England also increased its benchmark interest rates by 50 basis points to 3.5 percent and forecasted more.

The Reserve Bank of India also increased its policy repo rate by 35 basis points to 6.25 percent on Dec. 7. While the bank expects a moderate pace of monetary tightening, it warned that the fight against inflation is far from over.

The hawkish move by the likes of the Fed and the ECB dashed hopes that peak interest rates are on the horizon. The rate hikes also sparked fears of a possible recession.

Vinod Nair, head of research at Geojit Financial Services in India, told The Economic Times that the market was taken by surprise by the rate hike as it was expecting “a softer approach after the release of better-than-expected inflation numbers.”

Not Considering Rate Cuts

During a post-meeting press conference on Wednesday, Fed Chair Jerome Powell said there’s still a long way to go in the fight against inflation. Most officials now anticipate raising rates above 5 percent next year, which is higher than previously projected.

“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2 percent in a sustained way,” Powell said.

Eric Peters, CEO of One River Asset Management, doesn’t believe the odds are in the Fed’s favor to bring the benchmark rate anywhere near 2 percent.

“We’re probably moving to an environment where inflation is between 3, 4, or 5 percent. Sometimes it goes a bit higher, sometimes it goes a little bit lower, but when you look at previous periods of higher inflation, they also have a lot of inflation volatility. So that’s what we need to live through right now,” Peters recently told Magnifi+, an AI investing and trading platform.

Reuters and Andrew Moran contributed to this report.