European equities and US short-term government bonds fell on Tuesday as traders weighed Jay Powell’s nomination for a second term as Federal Reserve chief and the further surge of coronavirus cases across Europe.
The regional Stoxx Europe 600 dropped 1.4 per cent, with benchmarks in Germany and France each off by more than 1 per cent. London’s FTSE 100 dipped 0.6 per cent.
The S&P and Nasdaq Composite had ended the prior day’s session down 0.3 per cent and 1.3 per cent lower respectively. Tech stocks are deemed to be more sensitive to rising interest rates, and Fed policy is expected to be more hawkish with Powell as head of the US central bank than under his mooted contender, Lael Brainard, tapped as vice-chair by US President Joe Biden.
“While the reappointment . . . of Fed chair Powell was market’s base case, there was a significant rise in chances of a perceived dovish Brainard for the role. Thus, the nomination of Powell as Fed chair for another term triggered a hawkish market response,” said analysts at Citigroup.
Fed fund futures — a market for hedging against or betting on future interest rate moves — are now pointing to a roughly 75 per cent chance that the Fed lifts rates from historic lows by next June, up from around 60 per cent a month ago, according to data compiled by CME Group.
The shift is reflected in short-term US government bonds. The two-year Treasury yield rose 0.05 percentage points to 0.64 per cent in European dealings on Tuesday, extending a rise from Monday. The yield on the debt, which is sensitive to fluctuations in monetary policy expectations, sat at about 0.3 per cent at the start of October.
Longer-term bond yields have been steadier, reflecting expectations that the surge in inflation that is pushing central banks around the world to begin easing their pandemic-stimulus efforts will begin cooling over the medium term. The 10-year Treasury yield was recently little changed at 1.63 per cent.
JPMorgan strategists said that overall, “Powell’s reappointment reduces uncertainty, and hence should be a positive for risk assets.”
“Historically, markets try to test new Fed chairs, so we believe this outcome will be avoided,” the Wall Street bank said in a note to clients. “Additionally, Powell’s experience from the second half of 2018, where policy tightening contributed to the strong market sell-off into year-end, will likely result in a cautious approach to lift-off next year.”
Futures contracts tracking Wall Street’s blue-chip S&P 500 index were down almost 0.4 per cent, suggesting US equities could come under more pressure at the New York open. Contracts tracking the Nasdaq 100 index slipped 0.5 per cent.
European shares also closed lower on Monday, after several countries were last week forced to reimpose pandemic restrictions, because of surging coronavirus case numbers. The new curbs led to multiple protests over the weekend.
Asian markets moved slightly lower on Tuesday, with the MSCI Asia Pacific index off 0.3 per cent in US dollar terms. Hong Kong’s Hang Seng share gauge dipped 1.2 per cent, knocked lower by technology and healthcare stocks among other sectors. China’s CSI 300 was flat, as academic and educational services as well as real estate stocks helped to temper declines in technology and consumer cyclicals.
Meanwhile, in currencies, the euro traded at near its weakest level against the dollar since July 2020 — up 0.2 per cent at about $1.125.
The Turkish lira hit its weakest point against the dollar on record after the country’s president Recep Tayyip Erdogan praised last week’s 1 percentage point interest rate cut and said his country was fighting an “economic war of independence”. Turkey last week cut its interest rate to 15 per cent, despite annual inflation running at 20 per cent.
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