A shortlived rally for beaten-down global shares fizzled on Wednesday, while government bond prices firmed, as investors awaited further clues on US rate rises and business surveys that may indicate an economic slowdown.
Ahead of Federal Reserve chair Jay Powell’s two-day testimony to Congress, where he may indicate plans to follow up this month’s extra large 0.75 percentage point interest rate rise with another large rise in July, Europe’s Stoxx 600 share index lost 1.4 per cent.
Energy companies led the falls, as Brent crude oil dropped 4 per cent to just over $110 a barrel, knocked by US president Joe Biden pushing for tax measures to lower fuel costs following sharp increases driven by Russia’s invasion of Ukraine.
Futures trading also implied that Wall Street’s S&P 500 would lose 1.5 per cent after a 2.5 per cent rise on Tuesday, in a session characterised by bargain hunting following a steep decline in the previous week.
“We are in a cycle of high inflation triggering interest rate rises, which in turn trigger economic weakness,” said Marco Willner, head of investment strategy at NN Investment Partners.
On Thursday, closely watched purchasing managers’ indices produced by S&P Global — which collate executives’ responses to questions on topics such as input costs and order volumes — are expected to show that business activity has slowed in both the US and the eurozone.
“We look for both the manufacturing and services PMIs to provide further signs of weakening,” analysts at TD Securities said in a note to clients.
Powell, meanwhile, is likely in his congressional appearance to signal that a half or three-quarter point rate rise was coming in July, analysts at Deutsche Bank and Daiwa Capital Markets said in notes to clients.
Money markets imply the Fed will lift its main funds rate above 3.6 per cent this year, while the European Central Bank is poised for its first rate rise in more than a decade next month.
The S&P 500 is more than a fifth below its January all-time peak. Although the grind lower has featured some sharp rallies, investors are fretting about inflation, which has climbed to fresh record highs in the US and Europe, hitting the profits of companies already grappling with rising debt costs.
“Client activity is muted with everyone universally bearish and a sell-all rallies mentality,” JPMorgan head of US market intelligence Andrew Tyler said.
The yield on the 10-year US Treasury note, which moves inversely to its price and underpins global debt pricing, fell 0.09 percentage points to 3.22 per cent on Wednesday.
The equivalent UK gilt yield dropped 0.11 percentage points to 2.53 per cent, after data showed British inflation hit 9.1 per cent last month, up from 9 per cent in April — increasing fears of a recession that may hamper the Bank of England’s ability to continue raising interest rates.
In Asia, Japan’s yen tumbled to a fresh 24-year low of ¥136.71 against the dollar as traders bet on the Bank of Japan maintaining ultra-low borrowing costs, in defiance of the global trend.
A FTSE index of Asia-Pacific stocks outside Japan, which also rose on Tuesday, dropped 2.2 per cent on Wednesday. Tokyo’s Topix slipped 0.2 per cent lower.