Cautious European markets assess US rates outlook

London — European stocks headed lower on Thursday as cautious investors continued to assess how far and fast the US Federal Reserve will begin raising interest rates this year.

Also keeping a lid on buying were the tech-laden US Nasdaq entering correction territory on Wednesday, a sell-off in bonds, still-elevated crude oil prices and increased political tensions over Ukraine.

Chinese stocks were a bright spot after the country cut benchmark mortgage reference rates to ease pressure on its property sector.

The Stoxx index of 600 European companies was down 0.17% at 480 points, below its all-time high of 495.46 points recorded in the first week of trading this year. Blue-chip indices in Frankfurt, Paris and London were all lower.

Gains in Asia helped to counter the pullback in Europe to keep the MSCI all country stock index in positive territory. It was up 0.16% at 728 points, but still about 3.8% lower so far this year.

“There is a tonne of caution now,” said Seema Shah, chief strategist at Principal Global Investors. “The key factor that markets are thinking about is Fed tightening.” 

Rising US interest rates could dent global growth prospects and the earnings outlook for international companies. Economists polled by Reuters say they expect the Fed to tighten monetary policy at a much faster pace than thought a month ago to tame high inflation.

Shah said the year opened with elevated valuations in markets and the sell-off in bonds since then has fuelled a growing sense of caution as markets ask if they have priced in sufficient Fed rate hikes.

“That’s what’s driving a lot of the caution at the moment. Even with four hikes, the question is: is that enough and should we get ahead of this continued forecasting that we have been seeing?,” Shah said.

European Central Bank head Christine Lagarde said eurozone inflation is expected to decrease gradually over the year, adding that bank did not need to act as boldly as the Fed because of a different economic situation.

Analysts said global growth still remained solid, but investors wanted reassurance of that in the earnings season now unfolding.

Asia perks up, Ukraine on the radar

Asian share markets broke a five-day slide on Thursday as China underscored its diverging monetary and economic picture by cutting benchmark mortgage rates.

The country’s blue-chip CSI300 index rose 0.9% on the day. Property development stocks boosted gains in the broad index as investors hope that the government measures will help to ease a funding squeeze in the embattled sector, even as another developer warned of default.

Seoul’s Kospi rose 0.7% and Australian shares gained 0.14%. In Tokyo, the Nikkei added 1.11%.

Analysts at ING said geopolitical risks, notably the possibility of Russia invading Ukraine, could continue to weigh on global shares, adding to the pressure from the rising rates outlook.

US President Joe Biden predicted on Wednesday that Russia will make a move on Ukraine, saying a full-scale invasion would be “a disaster for Russia” but suggested there could be a lower cost for a “minor incursion”.

“Markets may soon start to take into account a greater risk of a conflict flare-up between Russia and Ukraine, which is one reason stocks may continue to sell and why Treasury yields aren’t on a one-way ticket higher,” ING said.

Fed rate hike worries pushed US Treasury yields to two-year highs on Wednesday, and took Germany’s 10-year yield into positive territory for the first time since May 2019.

US yields edged higher on Thursday, but remained below their highs in the previous session.

The benchmark US 10-year yield rose to 1.839% from a US close of 1.827%, and the policy-sensitive two-year yield touched 1.0433% compared with a US close of 1.025%.

The pause in Treasury yields’ march higher kept the greenback in check, with the dollar index, which measures the greenback against six major peers, edging down to 95.527 as commodity currencies benefited from high oil prices.

The US dollar traded little changed against the Japanese yen at 114.21 and, and rose 0.06% against the euro to $1.1350.

Gold paused after marking its best session in three months a day earlier. Spot bullion was little changed at $1,840 an ounce.

Reuters