Wall Street stocks fell at the end of a wild week across global markets, as investors anticipated rapid interest rate rises by the US Federal Reserve and upbeat earnings from Apple failed to lift sentiment.
The benchmark US S&P 500 index lost 0.5 per cent in early New York dealings while the technology-focused Nasdaq Composite dipped 0.4 per cent, despite a strong quarterly update from Apple, the world’s largest company by market capitalisation.
Equity markets, particularly those on Wall Street, have swung sharply this week as investors grappled with a hawkish message from Federal Reserve chair Jay Powell following the US central bank’s monetary policy meeting on Wednesday.
Geopolitical tensions as Russian troops gathered at the Ukraine border have also helped to drive the S&P more than 9 per cent lower this month, approaching a technical correction. The Nasdaq was almost 18 per cent below its November record high at Thursday’s close.
“Two factors explain this difficult period for equity markets,” said Christophe Donay, chief strategist at Pictet Wealth Management. “Tensions over Russia and Ukraine have contributed perhaps a third of the correction and the rest is the Fed.”
Apple reported record quarterly revenues and better than expected profits overnight. The iPhone maker also revealed a lighter hit than analysts had forecast from coronavirus-related semiconductor supply chain glitches. The company’s shares added about 3 per cent in early trade on Friday.
Monetary policy concerns remained dominant, however. Powell on Wednesday refused to rule out raising rates from record lows to tackle soaring inflation. Futures markets have priced in about five interest rate rises this year, starting in March.
Higher interest rates increase companies’ borrowing costs and lower the present value of forecast profits in investors’ models.
The Fed’s hawkish turn has therefore challenged some investors to re-engineer portfolios constructed with a view that 2022 would be another year of strong economic and earnings rebounds from the shocks of coronavirus in 2020. As recently as mid-September, market pricing suggested the Fed would raise rates a maximum of once this year.
“This is a huge regime change,” said Gergely Majoros, investment committee member at fund manager Carmignac. “It is difficult to hold convictions.”
US Treasuries, which have been under selling pressure as expectations of higher interest rates and persistent inflation reduced the appeal of fixed income-paying securities, were broadly steady on Friday.
Core personal consumption expenditure data on Friday showed the Fed’s favoured measure of inflation rose at an annual rate of 4.9 per cent in December, slightly outpacing economists’ forecasts.
The yield on the two-year Treasury note, which moves inversely to its price and closely tracks monetary policy expectations, was flat at 1.19 per cent. The 10-year yield rose 0.01 percentage points to 1.82 per cent, up sharply from the end of 2021.
The dollar index, which measures the US currency against six others, was flat after climbing to its highest point in almost 18 months on Thursday.
European markets fell broadly on Friday, with the regional Stoxx 600 index down 1.6 per cent.
In Asia, Hong Kong’s Hang Seng index fell 1.1 per cent while Tokyo’s exporter-heavy Nikkei 225 added 2.1 per cent, boosted by a stronger dollar.
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Additional reporting by Tommy Stubbington