FTSE 100 falls on US rate worries

The more hawkish tone struck by the Federal Reserve has rattled investors and sent stock markets lower

US Federal Reserve - US tapering
The Federal Reserve last night brought its quantitative easing programme to an end Credit: Photo: Hisham Ibrahim

The FTSE 100 fell sharply on Thursday amid nervousness the US Federal Reserve may lift interest rates sooner than had been expected.

London’s benchmark index of leading shares fell 74 points to 6379, a 1.2pc slump, after the moderately hawkish tone of the American central bank’s latest policy update took investors by surprise and forced them to bring forward rate rise expectations. The CAC 40 in France was down 1.3pc and Germany's DAX lost 1.8pc.

As expected, the Fed last night brought its economy-boosting quantitative easing programme to an end, and fund managers are now focused on the timing of rate increases.

Bond market strategists at Rabobank described the Fed announcement as “a modestly more hawkish statement than had been anticipated”.

The central bank altered the language it used for its assessment of the jobs market, saying that "indicators suggest that underutilisation of labour resources is gradually diminishing". The Fed had previously said there was "significant underutilisation", and the change of wording was seized on by traders.

Deutsche Bank analysts said financial markets had begun to re-price monetary policy forecasts: “The market reaction to the statement was dominated by the move higher in the US dollar and yields.”

They said that investors were now expecting the first rate hike “late next year”, as opposed to two weeks ago, when the market was not anticipating a rise in 2015. The German bank expects rates to be lifted in the middle of next year.

The strengthening of the US currency hit commodities such as gold and oil, which are priced in dollars.

Brent crude fell 1pc to $86.26 a barrel and the spot price of gold lost 1.6pc to about $1,205 an ounce. Those moves in turn weighed on equities in London.

Shares in Tullow Oil fell 3.5pc, gold miner Randgold Resources lost 3.1pc and metals miner Anglo American shed 2.9pc.