On Thursday, stock markets were in the red, and some key government bond yields rose to their highest levels in years, as the Federal Reserve signaled the possibility of faster-than-expected rate hikes and stimulus withdrawal.
Both Asian and European indices fell sharply after Wall Street's tech-heavy Nasdaq fell more than 3% on Wednesday, and 2- and 5-year Treasury yields, key drivers of global borrowing costs, surged to post-COVID pandemic highs.
Minutes from the Fed's December meeting revealed that a tight labor market and persistent inflation could force the US central bank to raise interest rates sooner than expected and begin reducing its overall asset holdings, a process known as quantitative tightening (QT).
The STOXX 600 share index fell 1.3% in early European trading, wiping out all of the year's gains that had propelled it to new highs.
Asia has also seen significant drops. Australian shares fell 2.7%, their biggest daily percentage drop since early September 2020, while Japan's Nikkei fell 2.9%, its biggest daily percentage drop since June.
"Some people are quite spooked by the minutes from the Fed that they could be tightening faster," said Carlos de Sousa, an emerging markets strategist, and portfolio manager at Vontobel Asset Management.
"Maybe the market is overreacting a bit, though. The fact they are discussing this (quantitative tightening) doesn't mean they are going to do it," he said, adding that he expected 1-3 rate hikes in 2022 but would be surprised if QT did happen this year.
The minutes revealed that Fed officials were uniformly concerned about the rate of inflation, which was expected to continue "well into" 2022, alongside global supply bottlenecks.
The Nasdaq fell 3% on Wednesday, the most since last February, and the S&P 500 fell the most since Nov. 26, when news of the Omicron variant first hit global markets.
"There is a risk that the Fed might fall into the trap of making policy errors because they do have to perhaps hike interest rates faster than expected, but given the timing of their exit from quantitative easing, it could coincide with a slowdown in the economic cycle and also a decline in inflation on base effects," Casanova said.
Treasury yields in the United States continued to rise across the yield curve in European trading. The 10-year yield in the United States rose above 1.73% on Thursday, reaching its highest level since April 2021, and was last at 1.732%, up from 1.703% on Wednesday.
The policy-sensitive 2-year yield in the United States reached a new 22-month high of 0.863%, while the 5-year yield reached highs last seen in February 2020 of 1.459%.
In Europe, 10-year Germany Bund yields, which rolled over into a new benchmark, rose to -0.05%, the highest level since May 2019, according to Refinitiv data.
While the rollover into a new contract made the move in Bund yields appear large, analysts said that even when measured on a continuous basis, yields were at new multi-month highs.
In commodity markets, global benchmark Brent crude held steady at $79.14 per barrel, while US crude fell to $80.08 per barrel after OPEC+ producers agreed to increase output and on a surge in US stockpiles.
Spot gold was down 0.8% at $1,794 per ounce, with higher US bond yields dulling the precious metal's luster.