Technology shares dropped across Europe and Asia, while banks rose, as investors responded to a strong signal of imminent interest rate rises from the US central bank.
Europe’s regional Stoxx 600 share index was down 0.3 per cent by late morning in London, masking a powerful rotation as money seeped out of more speculative areas of the market and financials perked up on prospects of wider lending margins.
The Federal Reserve indicated on Wednesday that it would begin raising interest rates at its next policy meeting in March to stamp down on surging inflation, sharply reversing the supportive monetary policies it has implemented during the coronavirus pandemic.
Fed chair Jay Powell also declined to rule out consecutive rate increases later in the year, driving futures markets to price in around five increases by December. JPMorgan strategists now expect the world’s most influential central bank to raise its main funds rate from close to zero to about 0.65 per cent by June and 1.13 per cent by the end of this year.
The Stoxx 600 technology index fell 1.8 per cent, while a gauge of Chinese tech stocks listed in Hong Kong closed 3.8 per cent lower. Mainland China’s CSI 300 share index dropped into a bear market, closing more than 20 per cent below its most recent high of February last year.
Higher interest rates not only threaten corporate profits by raising borrowing costs; they also lower the present value of companies’ forecast earnings in investors’ models, in an effect that is magnified for businesses whose peak earnings are not expected until years into the future.
“Global markets are now more sensitive to the direction of central bank policy than the latest news either on [corporate] earnings, macroeconomic data or the coronavirus,” said Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners.
Equity markets have shifted violently in recent weeks. Wall Street’s benchmark S&P 500 index has lost about 9 per cent of its value in January, with speculative tech stocks hit particularly hard. On Thursday, futures markets implied the S&P would fall 0.1 per cent in early dealings.
The dollar index, which measures the US currency against six others including the euro and the yen, rose 0.9 per cent and was on track for its strongest week since June.
US Treasury markets, meanwhile, illustrated concerns about a rapid rate rise cycle denting the growth prospects of the world’s largest economy. The yield on the two-year Treasury jumped 0.09 percentage points to 1.184 per cent as the price of the government debt instrument fell. The 30-year yield fell 0.03 percentage points to 2.13 per cent as the price of the longer-term note rose.
This flattening of the so-called yield curve occurs when money managers sell shorter-term bonds because expectations of rate rises and high inflation lower the appeal of the fixed income-paying securities. It can also precede economic downturns.
“We’ll have to see if growth will stay strong despite the tightening of monetary conditions,” said Nicolas Forest, head of fixed income at fund manager Candriam. “But the main risk for 2023 is that it won’t.”
Brent crude, the global oil marker, rose 0.1 per cent to $90.07 a barrel.
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