European stock markets slumped yesterday, spooked by the prospect of a US interest rate hike as early as this month, and mirroring earlier falls in Asia.
Speculation that the Fed may tighten rates in September also weighed on New York, but bargain-hunting lifted Wall Street into mildly positive territory after a weaker start.
This, in turn, helped European markets also bounce off early lows.
Eurozone markets in particular were also worried by signs that the European Central Bank has become less aggressive in its support for the economy, including with its huge quantitative easing programme.
“The market is continuing the trend seen at the end of last week after the ECB met. It believes that the bank does not want to go further with its accommodating policy,” IG France analyst Alexandre Baradez told AFP.
A September rate rise in the US had appeared to be off the table following a string of weak data.
But on Friday, US Federal Reserve Bank of Boston president Eric Rosengren renewed speculation of a hike when he said in a speech that higher rates were needed to prevent the economy from overheating.
“While this doesn’t necessarily mean that rates will go up in September it still causes uncertainty which historically stocks rather dislike,” said Markus Huber, a trader for City of London markets.
In addition to the comments by Rosengren, a usually dovish Fed governor, Daniel Tarullo, also signalled his openness to a 2016 increase in a television interview.
“There is a consistent undertone building among the Fed Board that delaying rate hikes will hinder rather than assist the economic recovery,” said Stephen Innes, senior trader at OANDA.
Their remarks come as the head of the European Central Bank has played down the chances of fresh monetary stimulus for the eurozone, while Japanese officials have refused to give concrete assurances about new measures.
In London, the banking sector led the way down on the prospect of higher rates, with Royal Bank of Scotland losing 3.4% and Lloyd’s just under 4%.
Mining stocks also dropped as commodities prices fell, with BHP and Rio Tinto both shedding over 2%.
In Frankfurt, Linde shares fell 7% after the German gas giant and US peer Praxair ended merger talks, leaving intact the number one spot in industrial gases for France’s Air Liquide, which fell 1% in Paris.
Across the Atlantic, Agrium Inc and its rival Potash Corp yesterday said they had agreed to merge to create a $36bn global crop fertiliser behemoth.
The new company will combine potash, nitrogen and phosphate production with a global distribution network, employing just under 20,000 people, and is to generate $500mn in annual savings from joint operations.
But investors in both companies were not convinced by the math.
Agrium shares listed on Wall Street fell 2.4% in late morning New York, while Potash stock dropped by 1%.