Wall Street and European equities stable after inflation fears rocked markets
Wall Street stocks partially recovered from the steep drops in the previous session, when fears of prolonged inflation and possible central bank rate hikes resulted in the worst day for US stock markets since May .
The blue-chip S&P 500 stock index gained 0.6% at the start of trading in New York after losing 2% on Tuesday. The tech-focused Nasdaq Composite rose 0.7% after falling 2.8% the day before.
The yield on the 10-year US Treasury bill, which moves in the opposite direction to its price, fell 0.03 percentage points on Wednesday to 1.506 percent. This key return on debt, which influences borrowing costs around the world and tracks interest rate and inflation expectations, has fallen by about 1.3% over the past week.
The Stoxx Europe 600 index rose 0.6% after losing 2.2% on Tuesday, although analysts warned that stock markets are likely to remain volatile.
“Even if you’re not that optimistic about the long term, it’s generally beneficial to buy the lows in times of panic,” said Trevor Greetham, head of multi-asset at Royal London. “But we could still be in a period of several weeks of heightened volatility.”
Last week, policymakers at the U.S. Federal Reserve and the Bank of England signaled their first post-pandemic rate hikes could come sooner than markets expected.
These concerns have been exacerbated by the sharp increases in the prices of oil and natural gas. Brent crude oil hit $ 80 a barrel for the first time in nearly three years on Tuesday, before falling back to $ 78.46 on Wednesday.
The Bank of England has warned that inflation could exceed 4% next year, raising expectations of a UK rate hike that pushed the 10-year gilt yield above 1% on Tuesday for the first time times since March 2020.
On Wednesday, the pound fell 0.7% against the dollar to $ 1.344, marking its lowest point of the year so far after a fuel crisis in the UK heightened fears of ‘an economic slowdown.
The pound’s “disconnect with pricing” raised concerns that the pound “is getting really unpredictable,” said Jordan Rochester, currency strategist at Nomura.
“We are going through stagflation, which is the worst part of the economic cycle for stocks,” said Greetham of Royal London.
“Stock markets are worried about the future of corporate earnings and central banks are worried about the future of interest rates.”
Economists expect the US economy to grow 4.7% on an annualized basis in the third quarter of this year, down from the previous three months. Headline inflation in the United States has exceeded 5 percent for three consecutive months.
Central banks responded to the spread of the coronavirus in March 2020 by cutting interest rates to record highs and increasing government bond purchases, lowering yields and pushing the FTSE All-World Index to global equities at an all-time high in early September.
But on Tuesday, Fed Chairman Jay Powell told Congress that inflationary pressures in the United States could be “more lasting than expected.”
“We are now getting closer and closer to the end of a very accommodative monetary policy,” said Bastien Drut, chief macro strategist at CPR Asset Management.
With soaring oil and gas prices and the risk of contagion from a potential collapse of debt-laden Chinese homebuilder Evergrande, he said, “the outlook is less optimistic than there was. some months”.