European equities dropped and Wall Street stock futures were mixed at the end of a wild week for global markets, as investors balanced the prospects of a rapid round of interest rate rises by the US Federal Reserve with an upbeat quarterly update from Apple.
The regional Stoxx 600 share index lost about 1 per cent in early dealings, following a volatile session on Wall Street in which the main US indices initially rallied before closing lower.
Futures markets suggested the benchmark US S&P 500 index would add 0.1 per cent when trading opens in New York, while contracts tracking the technology-focused Nasdaq 100 added 0.5 per cent.
Equity markets, particularly those on Wall Street, have swung this week as investors grappled with a hawkish message from Federal Reserve chair Jay Powell at the end of the US central bank’s monetary policy meeting on Wednesday.
Rising geopolitical tensions as Russian troops have gathered at the Ukraine border have also cast a pall over the market mood and helped to drive the S&P more than 9 per cent lower this month as it skirts a technical correction.
“Two factors explain this difficult period for equity markets,” said Christophe Donay, chief strategist at Pictet Wealth Management. “Tensions over Russia and Ukraine have contributed perhaps a third of the correction and the rest is the Fed,” he added, “but in the background we also have resilient earnings.”
Apple reported record quarterly revenues and better than expected profits overnight. The iPhone maker also revealed a lighter hit than analysts had forecast from coronavirus-related semiconductor supply chain glitches, which have contributed to soaring inflation in the US and Europe.
Apple’s shares jumped 4 per cent in pre-market trading, helping to lift some Asian equities earlier in the session. South Korea’s technology-heavy Kospi rose 1.9 per cent.
Chinese markets turned lower, with Hong Kong’s Hang Seng index falling 1 per cent. Tokyo’s Nikkei 225 closed 2.1 per cent higher as Japan’s exporters were boosted by a stronger dollar and weaker yen.
Powell on Wednesday refused to rule out lifting interest rates from pandemic-era record lows to stamp out soaring inflation, prompting futures markets to price in about five interest rate rises this year, starting in March.
Higher interest rates increase companies’ borrowing costs and lower the present value of forecast profits in investors’ models.
Money managers will focus on businesses “that can produce strong near-term earnings growth”, said Marija Veitmane, State Street senior multi-asset strategist.
Tighter monetary policy has caused money to seep out of speculative tech stocks this month, helping drive the Nasdaq Composite almost 18 per cent below its November all-time high.
“Last year, very accommodative policy lifted all the boats. Now, it’s about finding companies with strong near-term earnings and the right business model, and large-cap tech remains an area of strength,” Veitmane said
Shorter term US Treasuries came under renewed selling pressure on Friday as expectations of higher interest rates on cash and persistent inflation made the fixed income securities less appealing.
The yield on the two-year Treasury note, which moves inversely to its price and closely tracks monetary policy expectations, rose 0.02 percentage points to 1.21 per cent. The five-year Treasury yield rose 0.02 percentage points to 1.68 per cent. The 10-year yield also added 0.02 percentage points to 1.83 per cent, up sharply from the end of 2021.
The dollar index, which measures the US currency against six others, was broadly steady after climbing to its highest point in 18 months on Thursday.