US stocks and government bonds turned lower on Wednesday as investors assessed a gloomy outlook for interest rates, inflation and economic growth.
The blue-chip S&P 500 share index, which eked out gains over the past two sessions but remains more than a tenth lower for the year, slipped 0.6 per cent in early dealings. The technology-heavy Nasdaq Composite fell 0.4 per cent.
Equity and bond markets also trended downwards in Europe, where the European Central Bank is expected on Thursday to signal a significant shift away from its long-held policy of keeping interest rates below zero.
The regional Stoxx 600 share index fell 1 per cent, with bank and industrial shares performing worst as investors weighed up the implications of higher rates for economic growth and the eurozone’s weakest borrowers. Germany’s Xetra Dax lost 0.9 per cent, with similar falls across France, Italy and Spain.
In the past two days, both the World Bank and the Paris-based OECD have cut their global growth forecasts because of the Ukraine war and higher energy prices.
As growth slows, surging inflation is pushing major central banks to lift borrowing costs and withdraw huge monetary stimulus schemes introduced in the early 2020 coronavirus crisis, with investors grappling to understand the implications for asset prices.
“We’ve had this huge monetary intervention and we’re just starting to see it unwind,” said Roger Lee, head of equities at Investec. “The idea that the market has priced this correctly seems very optimistic.”
In the US, data on Friday are expected to show the annual pace of consumer price rises held above 8 per cent in May. The yield on the 10-year US Treasury note, which underpins borrowing costs worldwide, added 0.04 percentage points to 3.01 per cent as the price of the debt instrument fell.
This important debt yield has doubled since January, boosted by pledges from Federal Reserve chair Jay Powell to keep tightening monetary policy until inflation is tamed.
Analysts also expect the ECB to signal that record-high inflation has convinced policymakers to raise the deposit rate, currently at minus 0.5 per cent, back above zero by September. The ECB introduced negative interest rates in June 2014 to stimulate lending and spending and has not raised borrowing costs since 2011.
“The ECB appears set to hike rates given sticky upward inflation pressures,” strategists at Barclays said in a note to clients, adding that “a path to a soft [economic] landing is narrow”.
The yield on Germany’s 10-year Bund, a benchmark for eurozone debt costs, added 0.07 percentage points to 1.36 per cent, around its highest since 2014.
Italy’s equivalent bond yield rose 0.09 percentage points to 3.48 per cent, having almost tripled since the start of the year as traders anticipated that weaker eurozone nations would struggle with economic downturns and higher debt costs.
In currencies, the euro added 0.3 per cent against the dollar to $1.07. The Japanese yen continued its slide to ¥134 per dollar, down almost 4 per cent this month and pushed lower by expectations that the Bank of Japan will defy global trends and keep monetary policy loose.
Asian stocks rallied, mirroring gains on Wall Street in the previous session, with Hong Kong’s Hang Seng index adding 2.2 per cent and Tokyo’s Nikkei 225 up 1 per cent.
Brent crude, the oil benchmark, rose 0.9 per cent to $121.62 a barrel.
