US and European stocks dropped, and short-dated German debt sold off, as traders anticipated central banks on both sides of the Atlantic raising interest rates to curb inflation.
The benchmark S&P 500 share index, which closed 1.5 per cent lower on Thursday after Federal Reserve chair Jay Powell said a 0.5 percentage point interest rate rise was “on the table” for May, was down a further 1.8 per cent by Friday lunchtime in New York. The technology-heavy Nasdaq Composite lost 1.5 per cent.
Europe’s regional Stoxx 600 share index closed 1.8 per cent lower as the spectre of higher borrowing costs in the eurozone weighed on companies’ earnings prospects, taking the gauge’s loss for the year to date to more than 7 per cent.
“There is increasingly hawkish rhetoric from central banks,” said Axel Botte, global strategist at Ostrum Asset Management. “They need to restrict spending, promote credit rationing and step on the brakes quite significantly to push inflation down.”
Powell on Thursday sent his strongest signal yet that the Fed would raise borrowing costs rapidly to fight the highest US consumer price increases for 40 years. “It is appropriate in my view to be moving a little more quickly,” he said at an IMF panel.
European Central Bank vice-president Luis de Guindos, meanwhile, told Bloomberg that, dependent on data, the first eurozone rate rise in more than a decade was “possible” from July.
The yield on the two-year German bond, which tracks eurozone interest rate expectations, rose 0.11 percentage points to 0.29 per cent — its highest point since September 2013. The 10-year Bund yield climbed 0.05 percentage points to 0.97 per cent, continuing a significant ascent from near zero in early March. Bond yields rise as their prices fall.
Markets are now pricing in a fed funds rate — the central bank’s main interest rate — of almost 2.8 per cent by the end of the year, up from between 0.25 per cent and 0.5 per cent at present.
Following a broad sell-off in the US Treasury market on Thursday, the two-year US Treasury yield, which tracks interest rate expectations, added 0.03 percentage points to 2.72 per cent, trading at around its highest point since December 2018.
The yield on the 10-year Treasury note — which underpins borrowing costs worldwide — was steady at 2.9 per cent, also close to its highest since late 2018.
In currencies, sterling dropped 1.5 per cent against the dollar to $1.283 — its weakest since late 2020 — after official data showed UK retail sales declined rapidly in March as high inflation exacerbated the cost of living crisis. The fall also came after the Financial Times reported that the UK government was preparing legislation that would enable it to tear up the Northern Ireland protocol, putting the post-Brexit EU trade deal at risk.
“It’s a perfect storm for sterling,” said Nicola Morgan-Brownsell, multi-asset fund manager at Legal & General Investment Management. “A large amount [of the fall] is those weak retail sales numbers but also Brexit risk has returned to the headlines.”
In Asia, China’s CSI 300 share index added 0.4 per cent after the nation’s securities regulator urged domestic banks and insurers to support the stock market. Japan’s Topix fell 1.2 per cent.
Brent crude, the oil benchmark, slipped 1.3 per cent to $106.88 a barrel.