Monday's drop follows a bruising first week of the year when a strong signal from the Fed that it would tighten policy faster to tackle inflation and then data showing a strong US labor market, unnerved investors who had pushed equities to record highs over the holiday period.
The pan-European STOXX 600 index sagged 1.51% and MSCI's gauge of stocks across the globe shed 1.40%. Goldman Sachs now expects the Federal Reserve to raise interest rates four times this year and begin the process of reducing its balance sheet size as soon as July, joining other big banks in forecasting an aggressive tightening of US monetary policy.
"The persistent rise in consumer inflation could further boost the Fed hawks, bring them to price a steeper normalization path, and more importantly fuel the expectation that the Fed should rapidly reduce the size of its balance sheet to avoid flattening the yield curve while fighting back inflation," said Ipek Ozkardeskaya, an analyst at Swissquote.While the December payrolls number released last week did miss forecasts, the drop in the jobless rate to just 3.