Global markets slide as investors keep a wary eye on the Fed and ECB

World stocks spluttered on Thursday, pressured by a pullback in Chinese stocks and higher US bond yields amid fears the Federal Reserve and European Central Bank (ECB) will keep raising interest rates to combat high inflation.

European shares dropped to a one-month low as worse-than-expected eurozone inflation numbers justified what is widely expected to be another 50 basis-point hike in the ECB’s decade-high rates this month.

Consumer price inflation in the 20 countries sharing the euro eased to 8.5% in February from 8.6% a month earlier on lower energy prices, but still expectations for 8.2% in a survey of economists.

MSCI’s broadest index of world shares dipped 0.2%, hovering near seven-week lows, while the Stoxx 600 index slid 0.3% and Wall Street’s S&P futures were down 0.6%.

Investor enthusiasm about the reopening of China’s economy after authorities dismantled strict Covid-19 controls in December has faded, as analysts look for more evidence to gauge the pace of recovery.

Stock and bond markets in the past weeks have been driven by different factors, said Kevin Gardiner, global investment strategist at Rothschild & Co. The chief concern for stocks is the expectation of pressured corporate profits, while bonds are sensitive to inflation and rate expectations.

“In the past few months, stock markets have been digesting that despite all of these predictions of imminent collapse in profits, a severe economic downturn has not materialised,” he said.

Falling natural gas prices and a clearing of supply chain bottlenecks after Russia’s invasion of Ukraine is an overlooked development in capital markets, Gardiner added.

“The economic impact of tightening remains a puzzle. Profitability might not be that fragile, at least, not yet.”

Nasdaq futures were 0.7% lower, hit by a 5.5% slump in Tesla shares in after-hours trading. The company said it will cut vehicle assembly costs by half in future generations of cars, but CEO Elon Musk did not unveil a much-awaited small, affordable electric vehicle.

Overnight, benchmark government bonds and shares had taken a blow, as inflation indicators from Germany and the US reinforced expectations that interest rates would go higher and stay there for longer.

Germany’s two-year government bond yield rose to its highest since October 2008.

In the US, manufacturing activity contracted for a fourth straight month in February, but a gauge of prices for raw materials increased last month, stoking concerns that inflation would remain stubborn.

“Economic data has surprised to the upside,” said Steven Oh, global head of credit and fixed income at PineBridge Investments. Any unexpected result in the data would drive policymakers to be more aggressive, and that’s reset market expectations, he added.

“Now the question becomes, have we reset expectations sufficiently and where do we go from here?” Oh said.

Benchmark 10-year Treasury yields hit a four-month high of 4.034%, while two-year yields also advanced to 4.902%, a 16-year high.

Investors still mostly foresee the Fed raising rates by 25bp at its next meeting later this month, though expectations of a 50bp hike have increased. The probability that the Fed’s policy rate could peak above 5.5% is now 53% compared with 41.5% on February 28, according to CME’s FedWatch Tool. The policy rate is current 4.5%-4.75% 

In currency markets, the dollar index, which measures its value against a basket of major peers, gained 0.2% to 104.62.

The euro weakened 0.4% to 1.0625 and the pound dipped 0.42%, with hotter-than-expected inflation numbers adding to pressure on the ECB to raise rates.

Shares in Silvergate Capital plunged by as much as 28% after the cryptocurrency-focused bank said it was delaying its annual report and was evaluating its ability to operate as a going concern.

Spot gold was slightly lower at $1,832.73 an ounce.

Reuters