Stock markets turn lower as investors weigh economic outlook

Global stocks fell on Wednesday and government bond prices rose, as investors reacted to comments from the US Federal Reserve chair and awaited business data that may indicate an economic slowdown.

As Fed chair Jay Powell began a two-day testimony to lawmakers, seeking to soothe concerns about a recession after the central bank this month raised interest rates by the most since 1994, Wall Street’s S&P 500 share gauge slipped 0.8 per cent.

The technology-focused Nasdaq Composite share index lost 0.7 per cent, while Europe’s Stoxx 600 fell 1.4 per cent.

Brent crude, the oil benchmark, dropped 6.2 per cent to $107.6 a barrel.

Global shares had climbed on Tuesday as traders hunted for bargains following a steep weekly drop — the tenth such decline for the FTSE All-World index of developed and emerging market shares in 11 weeks.

The S&P remains more than a fifth below its January all-time high, however, with bursts of optimism during the downtrend failing to buck negative sentiment.

“We are in a cycle of high inflation triggering interest rate rises, which in turn trigger economic weakness,” said Marco Willner, head of investment strategy at NN Investment Partners.

“Client activity is muted, with everyone universally bearish and a sell-all rallies mentality,” said Andrew Tyler, head of US market intelligence at JPMorgan.

US consumer price inflation hit a fresh 40-year high of 8.6 per cent in May, surprising many investors who believed that price rises, spurred by Russia’s invasion of Ukraine and coronavirus-related supply chain glitches, would have peaked.

The Fed lifted its main funds rate by 0.75 percentage points this month, with many economists expecting an increase of similar magnitude next month.

Powell on Wednesday told the US Senate banking committee that “the American economy is very strong and well positioned to handle tighter monetary policy”. But he warned of “further surprises” from inflationary trends.

Money markets imply that the Fed will lift its main funds rate above 3.6 per cent this year, while the European Central Bank is poised for its first rate rise in more than a decade next month. This combination of high inflation and increasing borrowing costs, investors say, threatens corporate profits and economic growth.

On Thursday, closely watched purchasing managers’ indices produced by S&P Global — which collate executives’ responses to questions on topics such as input costs and order volumes — are expected to show that business activity has slowed in both the US and the eurozone.

“We look for both the manufacturing and services PMIs to provide further signs of weakening,” analysts at TD Securities said in a note to clients.

The yield on the 10-year US Treasury note, which moves inversely to its price and underpins global debt pricing, fell 0.15 percentage points to 3.14 per cent on Wednesday as demand for the low-risk asset rose.

The equivalent UK gilt yield dropped 0.16 percentage points to 2.53 per cent, after data showed British inflation hit 9.1 per cent last month, up from 9 per cent in April — increasing fears of a recession that may hamper the Bank of England’s ability to continue raising interest rates.

In Asia, Japan’s yen tumbled to a fresh 24-year low of ¥136.71 against the dollar as traders bet on the Bank of Japan maintaining ultra-low borrowing costs, in defiance of the global trend.

A FTSE index of Asia-Pacific stocks outside Japan, which rose on Tuesday, dropped 2.1 per cent on Wednesday. Tokyo’s Topix slipped 0.2 per cent lower.

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