Europe stocks sink, Tokyo shares drop 2.8% as Fed hints at tightening

LONDON/ TOKYO — European equities sank on Thursday after the Federal Reserve signalled it was ready to hike interest rates sooner than expected to combat elevated inflation, sparking a global selloff.

London's benchmark FTSE 100 index slid 1.0 per cent to 7,445.04 points, after heavy losses earlier in Asia and overnight on Wall Street.

In the eurozone, Frankfurt's DAX index also shed 1.0 per cent to 16,111.16 points and the Paris CAC 40 lost 1.3 per cent to 7,283.62.

"The selloff for the European markets continues as every single sector is in red," said AvaTrade analyst Naeem Aslam.

"Everyone is concerned about the Fed's fast and furious monetary policy stance."

 Tokyo stocks plunged more than 2.8 per cent on Thursday over rekindled speculation that the US Federal Reserve may start tightening monetary policy sooner than expected.

The benchmark Nikkei 225 index gave up 2.88 per cent, or 844.29 points, at 28,487.87, while the broader Topix index lost 2.07 per cent, or 42.26 points, to 1,997.01.

The dollar stood at 115.85 yen, off from 116.04 yen in New York late Wednesday.

Japanese shares began the day with falls "after US shares dropped following minutes of the FOMC (Federal Open Market Committee) meeting that prompted expectations the Fed will accelerate the normalisation of monetary policy," senior market analyst Toshiyuki Kanayama of Monex said.

Among major Tokyo shares, Uniqlo operator Fast Retailing fell 4.89 per cent to 60,880 yen after the firm reported falling December sales due to warm weather. 

Sony Group plunged 6.89 per cent to 14,455 yen after two days of rallies, and after it announced on Wednesday it would explore entering the rapidly growing electric vehicle market.

Toyota gave up earlier gains and ended down 0.33 per cent at 2,284.5 yen, as did Honda, which fell 0.23 per cent to 3,408 yen.

High-tech investor SoftBank Group lost 0.89 per cent at 5,372 yen, and chip-testing equipment maker Advantest dropped 4.43 per cent at 10,780 yen.

The Fed signalled a more aggressive rate-tightening path than previously flagged, with officials arguing "it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated." The much-anticipated release of minutes from the US central bank's December policy meeting showed that while officials were concerned about the fast-spreading Omicron coronavirus variant, they were also confident the world's top economy was in good shape and able to absorb high borrowing costs.

"Last night's Fed fallout continues to reverberate," added CMC Markets analyst Michael Hewson.

"What appears to have spooked markets is talk about balance sheet reduction, and it is this that has prompted a quite a bit of anxiety with some (Fed officials) talking about the probability of when it might be appropriate to reduce the size of the balance sheet, thus pulling liquidity out of the market.

"This appears to have caught markets off guard, prompting concerns over tighter liquidity conditions," cautioned Hewson.