European equities dipped from a record high reached on Friday as investors turned cautious ahead of the US Federal Reserve’s latest monetary policy decision on Wednesday.
The Stoxx Europe 600 index fell 0.5 per cent, following declines in Asia driven by a crackdown on education companies in China and jitters about the US central bank moving closer to reining in its pandemic era asset purchases. Futures markets signalled Wall Street’s S&P 500 would lose 0.4 per cent in early New York dealings.
The Fed has purchased $120bn of bonds monthly since last March to support the economy, depressing yields on debt instruments and boosting the appeal of equities.
Economists do not widely expect strong guidance from Fed chair Jay Powell on when the bond-buying programme will be reduced. But Fed officials appear split about when to taper after US consumer price inflation accelerated to 5.4 per cent in the 12 months to June.
“Rhetoric from Fed officials suggest[s] that there is a division among members on the timing, pace and composition of tapering,” ANZ economist Tom Kenny said.
St Louis Fed president James Bullard told the Wall Street Journal this month that “the time is right” to pull back on monetary stimulus. Dallas Fed Robert Kaplan has also advocated for reducing stimulus measures.
Government bond prices rose on Monday, however, in response to deep falls in Asian equity markets. China’s CSI 300 share index dropped 3.2 per cent after the Beijing government over the weekend banned academic tuition groups from making profits, raising capital or going public.
The clampdown followed a flurry of antitrust moves against Chinese technology companies. Hong Kong’s Hang Seng index fell 4.1 per cent and South Korea’s Kospi 200 lost 1 per cent.
The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, dropped 0.05 percentage points to 1.238 per cent. The real yield on this debt, which adjusts the nominal income return for inflation expectations, hit a record low of minus 1.127 per cent.
Analysts have been surprised by a strong decline in the benchmark Treasury yield from close to 1.8 per cent in March, despite rising inflation rates and Fed officials last month bringing their forecast for the first post-pandemic rate rise forward by a year to 2023.
Some have blamed traders buying back into Treasuries after liquidating overly aggressive short positions taken out at the start of the year. The Fed’s Powell has also in recent weeks soothed rate rise fears by insisting that high inflation was a temporary effect of the economy reopening from shutdowns last year.
Others say the Treasury market remains focused on economic growth threats from the highly transmissible Delta coronavirus variant.
“The Treasury market has been signalling a full-on growth scare,” strategists at Jefferies wrote in a research note.
Lower net supply of new Treasuries in July may have also caused the price of the debt to rise, strategists at Citi said.
In currencies, the euro was flat against the dollar to purchase $1.1776 after hitting its lowest since early April last week as the European Central Bank signalled it would maintain deeply negative interest rates. The dollar index, which charts the progress of the greenback against major currencies, fell 0.1 per cent.
Brent crude, the international oil benchmark, fell 1.2 per cent to $73.19 a barrel.