US and European stocks fall as traders weigh monetary policy direction

Wall Street and European stocks fell on Wednesday as oil prices climbed ahead of an EU meeting to debate further sanctions against Russia, raising expectations of sustained global inflation and central banks responding with rate rises.

The benchmark S&P 500 share index, which had closed more than 1.1 per cent higher on Tuesday as investors moved money out of government bonds, lost 0.7 per cent. The technology-focused Nasdaq Composite fell 0.9 per cent. Europe’s regional Stoxx 600 share index was down 1 per cent.

Brent crude, the oil benchmark, rose 4.5 per cent to $120.64 a barrel, taking it up almost a quarter since February 23, the day before Vladimir Putin launched Russia’s invasion of Ukraine.

“The market always frets when we get an increase in the oil price because it heightens nerves about economic growth and inflation,” said Roger Lee, head of equity strategy at Investec.

Tuesday’s equity rally, he added, “was really caused by short-term asset allocation out of fixed income into equities, but stock markets are now refocusing on just how high interest rates might go”.

Earlier this week, Federal Reserve chair Jay Powell said the central banked needed to move “expeditiously” towards tighter monetary policy after the annual pace of US inflation hit a fresh 40-year high of 7.9 per cent in February.

US Treasury bonds are experiencing their worst month of losses since Donald Trump became president in 2016.

Some investors believe equities are set to outperform bonds in the coming months. The FTSE All-World index of developed and emerging shares has recovered from declines in response to the war in Ukraine and is up about 8 per cent since March 8, its lowest point since Russia’s invasion.

“In a situation where inflation lasts a bit longer, you do not want to be in bonds, you don’t want to be in cash,” said Randeep Somel, portfolio manager at M&G. “Companies that have stable cash flows and aren’t too affected by rising interest rates or inflation are an investment that’s working well.”

The yield on the 10-year US Treasury note, which moves inversely to its price, slipped 0.02 percentage points lower on Wednesday to 2.36 per cent — still around its highest since May 2019 — after the benchmark government debt security came under renewed selling pressure in the previous session.

In the UK, sterling dropped 0.5 per cent against the dollar to $1.319, holding a move from earlier in the session as chancellor Rishi Sunak revealed in his Spring Statement that official forecasters had lowered their economic growth predictions for this year.

UK government bonds rallied after the government announced plans to issue fewer bonds over the next year than markets had expected. The UK Debt Management Office said it planned to sell £124.7bn of gilts this year, substantially lower than the £152bn expected by banks polled Bloomberg. The 10-year gilt yield fell 0.07 percentage points to 1.64 per cent.

In Asia, Hong Kong’s Hang Seng index added 1.2 per cent as investors took advantage of lower valuations. Chinese equities staged their worst weekly drop since 2008 earlier this month, before top economic official Liu He pledged state support for the economy and financial markets. The Hang Seng remains more than 5 per cent lower for the year.

The Japanese yen hit 121.4 against the US dollar, its latest six-year low, reflecting the Bank of Japan’s caution towards raising interest rates to battle a rare bout of inflation in the Asian nation, in contrast to the Fed’s hawkish policies.

Additional reporting by Tommy Stubbington in London


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