Fed rate decision: European markets dive as dovish tones leave investors pessimistic

European markets opened lower on Friday (18 September) after the decision by the US Federal Reserve to hold US interest rates at 0%-0.25%. The FTSE 100 was down 0.6% minutes after the opening bell, while in Germany, the DAX lost 1.17%. Meanwhile, France's CAC40 was down 1.19%.

The fall, which recovered slightly, does not mean investors had rather seen an interest rate increase as much as it means they are worries about the dovish tone, which confirmed that the Fed is also concerned about state of the global economy.

Wall Street closed lower on 17 September, although markets were sent soaring shortly after the news and spiked into late afternoon trading. Currencies of emerging economies and global stock markets jumped on the news of the rate hold, although the gloomy mood of the Federal Open Market Committee in the press conference that followed, weighed markets down.

The Bank for International Settlements had said, ahead of the FOMC decision, that certain markets such as China's, would extremely vulnerable to an interest rate rise in September. China's financial situation is a serious global concern, the BIS said, as analysts now expect an annual economic growth of less than 7%, for the first time since 1992.

An increase in the interest rate by the US Fed, which has been highly anticipated although the body has refrained from raising it for the past nine years, could cause global spillover, according to the BIS.

Mike van Dulken, analyst at Accendo Markets, confirmed it was largely Fed president Janet Yellen's dovish outlook that increased concerns. He said: "Markets had anticipated either a dovish hike (easy does it) or a hawkish hold (be prepared), but the potential 'surprise' (we remain concerned) we had discussed was duly delivered. While markets had desired clarity, it appears that uncertainty (and volatility) may be here to stay."

He added: "The Fed's surprise decision to hold pat shows external factors clearly outweighing domestic progress where Labour markets have improved markedly and growth is at least present, even if inflation remains suspiciously absent. The Fed chair's warning about global market developments and China in particular, potentially derailing US growth and suppressing already low/no-flation shows how pivotal the decision to hike is/will be."

However, the market expectation had increasingly been that the Fed would hold the rates, especially after Yellen said she would rather hold them too long than increase them too soon.

Emerging markets made significant gains, with the Shanghai Composite up by 0.3% and currencies such as the Turkish lira and the Brazilian real winning against the US dollar, only to fall again by the end of the day.