European and Asian stocks were hit with further declines on Wednesday after Wall Street suffered its worst day since December, as the prospect of further substantial rises in interest rates from major central banks unnerved investors.
The recent sell-off has been driven by stronger than expected economic data in the US and Europe, which has cemented expectations that borrowing costs on both sides of the Atlantic will need to rise further — and remain high for longer — to tame inflation. Investors on Wednesday will look towards the release of the minutes of the latest US Federal Reserve meeting, at which the benchmark rate was raised by 0.25 percentage points.
In Europe on Wednesday, the region-wide Stoxx 600 and France’s CAC 40 fell 0.8 per cent, while Germany’s Dax dropped 0.7 per cent. London’s FTSE 100 dropped 1 per cent.
“It’s no great surprise” that the strong surveys of business activity in the US and eurozone this week have dented equities, said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. “We’re in this world where good news is bad news, so strong PMIs have prompted investors to expect a higher peak in interest rates.”
On Tuesday, the S&P Global Eurozone Composite purchasing managers’ index came in at 52.3, above expectations of 50.7, while the equivalent US index registered a reading of 50.2, an eight-month high that beat market expectations of 47.5.
US stocks recorded their worst day in two months in the aftermath. Wall Street’s blue-chip S&P 500 index closed down 2 per cent, with pullbacks in every sector, while the tech-focused Nasdaq Composite shed 2.5 per cent. They marked the steepest daily losses for both indices since December 15.
Futures markets indicated a slowdown in the sell-off at Wednesday’s US market open. Futures tracking the S&P 500 and the tech-heavy Nasdaq were down 0.1 per cent.
Stephen Innes, managing partner at SPI Asset Management, said the strong data pointed to “considerable momentum behind the growing consensus that the Fed will hold rates higher for longer in a more robust economic environment”.
In currency markets, the euro was down 0.2 per cent against the dollar on Wednesday, while the dollar index, which measures the greenback against six peer currencies, was up 0.1 per cent.
Earlier, Asian shares followed Wall Street lower. Japan’s benchmark Topix index fell 1.1 per cent, while China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 0.9 per cent and Australia’s S&P/ASX 200 fell 0.3 per cent on Wednesday.
In Hong Kong, the benchmark Hang Seng index gained after a sharp early fall to end 0.5 per cent down after the government announced it would give out consumption vouchers worth HK$5,000 (US$640) to all adult residents to support the city’s recovery from an economic slump.
In sovereign debt markets, yields on benchmark 10-year US Treasuries were down 0.01 percentage points at 3.94 per cent, but they remained near the highest levels since November on expectations that the Fed would be forced to continue raising interest rates.
Yields on interest rate-sensitive two-year notes fell 0.02 percentage points to 4.68 per cent after touching a three-month high on Tuesday.
“If you compare sentiment to one month ago, people were expecting the Fed might only have a little room left to hike,” said Dickie Wong, head of research at Kingston Securities. “But now it looks like inflation may not ease up and the Fed will have to raise rates repeatedly.”
Brent crude fell 1 per cent to $82.17 a barrel, while WTI, the US equivalent, dropped 1.1 per cent to $75.50.
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