Asian and European stocks fell on Thursday morning, after minutes from the last US Federal Reserve meeting indicated the central bank would prioritise fighting inflation ahead of economic growth for longer than some investors had hoped.
In Asia, Hong Kong’s Hang Seng index and Japan’s Topix fell 1 per cent and 0.9 per cent respectively, following European and US share moves in the previous session.
Europe’s Stoxx 600 index dipped 0.1 per cent at the open, while the FTSE lost 0.2 per cent.
Fed officials signalled that restrictive rates would be in place “for some time” in minutes from its July meeting released on Wednesday, delivering a blow to more optimistic investors that the central bank would quickly begin to unwind elevated interest rates as soon as there were signs that raging inflation was easing.
The minutes showed that officials supported raising interest rates to the point where they act as a drag on economic growth.
Disappointing results for US retail bellwether Target and declines for other consumer sectors pulled the blue-chip S&P 500 down 0.7 per cent on Wednesday, while the Nasdaq Composite dropped 1.3 per cent on the back of the Fed minutes and a poor day for tech stocks. Futures contracts tracking the S&P and Nasdaq 100 were down 0.3 and 0.4 per cent respectively on Thursday morning.
The Fed minutes and the darkening outlook on inflation in the UK brought an end to a strong few weeks for equity markets.
“After a very strong run for risk assets thanks to a narrative that we might have seen ‘peak inflation’, yesterday put a stop to that as multiple headlines came through that poured cold water on the prospect that central banks were about to let up on hiking rates,” wrote analysts at Deutsche Bank.
Short-dated sovereign debt, which is sensitive to interest rate expectations, also continued to sell off in the wake of higher than expected UK consumer price inflation.
Two-year gilt yields gained as much as 0.3 percentage points on Thursday, trading at their highest level since the 2008 financial crash. The large moves ricocheted across other bond markets, with German, Italian and American two-year bonds all selling off. which are sensitive to interest rate expectations.
In a sign of continued concerns about interest rate rises, yields continued to rise on Thursday. The two-year gilt yield gained 0.03 percentage points to 2.39 per cent. Two-year Bund yields rose by 0.06 percentage points to 0.78, while Italy’s two-year bonds added 0.07 percentage points to trade at 1.67 per cent. Bond yields rise as their prices fall.
Further data, in the form of US weekly jobless claims and home sales data, will provide more information on the state of the world’s largest economy later on Thursday.
The dollar, a safe haven asset for investors, made small gains against a basket of six other currencies, rising 0.3 per cent.