Stock markets turn lower on concerns over economic outlook

A shortlived rally for beaten-down global shares fizzled out on Wednesday and government bond prices firmed, as investors expected the US Federal Reserve to indicate further aggressive rate rises to combat inflation.

Europe’s Stoxx 600 share index lost 1.7 per cent in morning trade, handing back the gains it had made over the previous two sessions. The benchmark has lost more than 17 per cent this year. Germany’s Dax led fallers, shedding 2 per cent.

Futures trading also implied that Wall Street’s S&P 500 would start 1.7 per cent lower after the index posted a 2.5 per cent rise on Tuesday, in a session characterised by bargain hunting following a steep decline in the previous week.

The S&P 500 is more than a fifth below its January all-time peak, although the grind lower has featured some sharp rallies. Tuesday was the sixth session since early April where the Wall Street benchmark had gained more than 2 per cent, according to JPMorgan.

“Each of the five previous times we have seen the index fall the next day by an average of 2.5 per cent,” the bank’s head of US market intelligence Andrew Tyler said. “Client activity is muted with everyone universally bearish and a sell-all rallies mentality.”

Investors are fretting about the effects of inflation and debt costs on companies’ profits. Business activity surveys have signaled a manufacturing downturn caused by high commodity prices and coronavirus-related lockdowns in China.

Federal Reserve chair Jay Powell on Wednesday begins a two-day testimony to Congress, where he is expected to indicate that the US central bank would follow up this month’s extra large 0.75 percentage point interest rate rise with another of similar magnitude in July.

“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.

Economists polled by Reuters expect S&P Global’s US and eurozone purchasing managers’ indices — closely watched business surveys that are viewed as real-time indicators of economic conditions and are released on Thursday — to both have dropped slightly between May and June.

The yield on the 10-year US Treasury note, which moves inversely to its price and underpins global debt pricing, fell 0.07 percentage points to 3.23 per cent on Wednesday but remained close to its highest level since 2011.

The UK equivalent gilt yield dropped 0.09 percentage points to 2.56 per cent, after data showed British inflation surged to 9.1 per cent last month, 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 also rose on Tuesday, dropped 2.3 per cent on Wednesday. Tokyo’s Topix slipped 0.2 per cent lower.

Brent crude oil, which has been supported this year by sanctions against Russia for its invasion of Ukraine, fell 3.9 per cent to $110.21 a barrel on Wednesday following reports Washington was preparing tax measures to lower fuel costs.

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