US stocks sink over prospect of extended higher interest rates

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European and Asian stocks retreated on Tuesday, as investors adjusted to the prospect of interest rates staying higher for longer to tame global price growth.  

Europe’s region-wide Stoxx Europe 600 fell 0.5 per cent, extending losses to a fourth successive trading session, while France’s Cac 40 declined 0.8 per cent and Germany’s Dax gave up 0.7 per cent. 

In Asia, Hong Kong’s Hang Seng index dropped 1.5 per cent, China’s CSI 300 and Japan’s Topix both fell 0.6 per cent. 

Government bond yields across the US and Europe steadied after hitting multiyear highs in the past week, as hawkish central bank officials indicated that borrowing costs would remain at elevated levels for longer than the market expected. 

Yields on the benchmark 10-year US Treasury slipped 0.03 percentage points to 4.51 per cent, remaining near the post 2007-high they touched a day earlier. Yields on the 30-year note were down 0.03 percentage points at 4.63 per cent.

Yields on the 10-year German Bunds, a regional benchmark in Europe, slipped 0.01 percentage points to 2.78 per cent on Tuesday, remaining near their highest level since 2011.

“We have long thought that the equity market has been too aggressive in pricing in rate cuts and strong economic growth,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

“But an imminent end to rate hikes and the prospect of weaker growth as rates are kept higher for longer support our preference for fixed income.”

Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 lost 0.4 per cent ahead of the New York opening bell.

Investors are turning their attention to preliminary inflation data due later this week, which is expected to show that annual consumer prices in the 20-country bloc dropped to 4.5 per cent in September, down from 5.2 per cent in August.

Christine Lagarde, president of the European Central Bank, reiterated in a speech on Monday that rates in the eurozone will remain high for as long as necessary to bring inflation back to the 2 per cent target, even as activity begins to slow. 

Last week the ECB lifted its benchmark deposit rate by 0.25 percentage points to an all-time high of 4 per cent, in what was likely to be the last round of tightening scheduled for this cycle.

Adding to concerns over inflation, oil prices have risen almost 30 per cent since June, as some of the world’s leading producers of the fossil fuel announced a series of supply cuts to last until the end of this year. 

Brent crude, the international oil benchmark, declined 0.7 per cent to trade at $92.62 on Tuesday, and the US equivalent West Texas Intermediate fell by 0.8 per cent to $89.01.

“The recent surge in oil prices will make things even more complicated as it will both worsen the economic slowdown but also push up inflation,” said Carsten Brzeski, global head of macro at ING. “Balancing growth and inflation will become even harder.” 

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