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European markets reverse losses as US economy sees record growth

·Business Reporter, Yahoo Finance UK
·3-min read
European stock markets managed to eke out gains on Thursday, reversing earlier losses, as the US economy recorded the fastest growth since 1984. Photo: Jack Taylor/Getty Images
European stock markets managed to eke out gains on Thursday, reversing earlier losses, as the US economy recorded the fastest growth since 1984. Photo: Jack Taylor/Getty Images

European stock markets managed to eke out gains on Thursday, reversing earlier losses, as the US economy recorded the fastest growth since 1984.

In London, the FTSE 100 (^FTSE) pushed 1.1% higher on the day, thanks to a weaker pound against the dollar (GBPUSD=X), while the CAC (^FCHI) climbed 0.7% in Paris, and the Frankfurt DAX (^GDAXI) was 0.3% hgher.

"Once again, the FTSE 100 was an outlier among global markets, with 2022 proving to be quite a year for the underdog," said Russ Mould, investment director at AJ Bell.

"For the past decade the UK market has been like the last child to picked for a team in gym class, no-one having faith in its abilities for fear it wouldn’t perform well. But the FTSE 100 is now one of the best performing major markets this year on a relative basis."

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It came as the US central bank indicated last night that it plans to start raising interest rates “soon” to cool inflation, wiping out a Wall Street rally on Wednesday.

It held interest rates at near zero, but reiterated its commitment to withdrawing its pandemic-era easy money policies in the face of rapid price increases.

“With inflation well above 2% and a strong labour market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the policy-setting federal open market committee (FOMC) said in its statement.

“The Fed’s gone from being the market’s best friend, to a possible enemy,” Kyle Rodda, analyst at online trading platform IG, said. He added that the Fed was set on “bringing inflation down, rather than protecting asset prices”.

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The pound dropped to a one-month low against the dollar on the back of the news, as the US currency gained on bets the Fed could roll out faster and bigger interest rate rises. The pound tumbled 0.7% against the greenback to $1.3394, while the dollar surged to its highest level since July 2020 against other major currencies.

Elsewhere, UK car production slumped to its lowest level since 1956, as rising energy costs and computer chips shortages hurt the recovery.

Pound chart. Chart: Yahoo Finance
Pound tumbed against the dollar on Thursday. Chart: Yahoo Finance

Across the pond, the S&P 500 (^GSPC) rose 1% and the tech-heavy Nasdaq (^IXIC) climbed 0.6%. The Dow Jones (^DJI) edged 1.2% higher by the time of the European close.

It came as new data showed that the US economy grew 6.9% in the fourth quarter of last year, outstripping expectations despite the spread of the Omicron variant.

GDP growth in America was up from 6% in the previous quarter, meaning full-year growth for 2021 stood at 5.7% – the strongest rate since 1984.

The figures were driven by businesses rebuilding inventories and a pickup in consumer spending.

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"Much of the strong growth in fourth quarter GDP was due to businesses building up inventories, and the numbers indicate consumer spending slowed in December either because of Omicron or because spending was frontloaded in October and November as holiday shoppers feared shortages, Robert Frick, corporate economist at Navy Federal Credit Union, said."

"With the Omicron wave falling quickly, shelves restocked and consumer demand generally strong, we should see the economy continue its healthy recovery this quarter.”

Meanwhile, Asian stock markets tumbled by unusually wide margins overnight, with the Nikkei (^N225) tumbling 3.1% in Japan, the Hang Seng (^HSI) down 2%in Hong Kong, and the Shanghai Composite (000001.SS) dipping 1.8%.

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