Stocks dropped and the dollar rallied after a wave of rate hikes from central banks this week, with the Federal Reserve and the European Central Bank warning of more pain to come.

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The S&P 500 fell more than 2 per cent, closing at its lowest level in more than a month. The tech-heavy Nasdaq 100 dropped more than 3 per cent. Stocks in Europe also closed Thursday lower after the ECB’s upward revision to 2024 inflation projections. 

Oil snapped a three-day rally. Commodities from oil to copper were under pressure as fears of a global economic slowdown and waning demand mounted. The dollar climbed the most since September as investors sought haven assets. 

Risk assets have been on the back foot since Fed Chair Jerome Powell reiterated his hawkish stance on Wednesday and policymakers signaled a peak rate that was above market expectations. The ECB and the Bank of England were among major central banks that followed suit with hikes of half a percentage point. The BOE tempering its pace of monetary tightening was interpreted as a sign that rates could peak at a lower level than expected.

While the Fed and ECB also slowed the tempo of their hikes, Powell and ECB President Christine Lagarde hammered home their resolve to remain persistent as they battle inflation. This didn’t sit well with investors, who hoped for a dovish shift in tone. 

Traders are also digesting a bevy of U.S. data Thursday showing the economy cooling, even as a labor market stays strong. Softening in the labor market remains a big target for the Fed. 

“The pullback in the market today — we aren’t surprised by it,” Nadia Lovell, UBS Global Wealth Management senior U.S. equity strategist, told Bloomberg Television on Thursday. “This is a market that has traded on the hope that the Fed will not do what they say they will do. Yesterday they sent a clearly different message.”

Lovell doesn’t think a recession is already priced in and said she expects repricing in the first half of 2023 to account for slower growth.

Key events this week:

• Eurozone S&P Global PMI, CPI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 2.5 per cent as of 4:03 p.m. New York time
• The Nasdaq 100 fell 3.4 per cent
• The Dow Jones Industrial Average fell 2.2 per cent
• The MSCI World index fell 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 1 per cent
• The euro fell 0.6 per cent to US$1.0623
• The British pound fell 2 per cent to US$1.2176
• The Japanese yen fell 1.6 per cent to 137.68 per dollar

Cryptocurrencies

• Bitcoin fell 2.3 per cent to US$17,423.09
• Ether fell 3 per cent to US$1,271.7

Bonds

• The yield on 10-year Treasuries declined three basis points to 3.45 per cent
• Germany’s 10-year yield advanced 14 basis points to 2.08 per cent
• Britain’s 10-year yield declined seven basis points to 3.24 per cent

Commodities

• West Texas Intermediate crude fell 1.5 per cent to US$76.12 a barrel
• Gold futures fell 1.7 per cent to US$1,787 an ounce