European equities recouped most of their early losses by mid session on Wednesday as investors weighed the impact of comments from the Federal Reserve that it might make bigger interest rate rises to fight inflation.
The region-wide Stoxx 600 was flat while London’s FTSE 100 and the Cac 40 in Paris both lost 0.1 per cent. Germany’s Dax rose 0.1 per cent after industrial production data was stronger than expected.
US futures ticked up slightly on Wednesday, with the blue-chip S&P 500 rising 0.1 per cent and tech-heavy Nasdaq flat. On Tuesday the S&P lost 1.53 per cent, its biggest daily loss in a fortnight.
The moves followed heavy falls for many of Asia’s biggest markets. The Hang Seng in Hong Kong dropped 2.4 per cent and South Korea’s Kospi lost 1.4 per cent.
The declines came after Jay Powell, chair of the Federal Reserve, told a congressional hearing in Washington that the US central bank may need to raise interest rates more aggressively if the economy and inflation do not cool.
Successive data releases in February, such as consumer price inflation, have shown an economy in the grips of sticky inflation despite a year-long campaign of higher interest rates. Powell is scheduled to speak again on Wednesday, to the House financial services committee.
Bond yields rose and stocks fell overnight on Wall Street as investors began to expect the Fed to raise rates by half a percentage point at its next meeting, instead of the quarter percentage point as previously expected.
Investors will be carefully watching the release of US non-farm payroll and unemployment data on Friday.
Emmanuel Cau, head of European equity strategy at Barclays, said that Powell’s speech was “very much” the cause of equity declines. “We are back to square one, where Federal Reserve communication is forcing markets to reprice. The market now needs some ‘bad’ data, as if you end up with more pointing towards a hot economy it will have to price a 50 basis point hike.”
The yield on two-year US Treasuries, which are more sensitive to monetary policy, rose 0.03 percentage points to 5.04 per cent. On Tuesday, the two-year yield rose above 5 per cent for the first time since 2007.
The yield on US 10-year notes fell 0.01 percentage points to 3.97 per cent. The yields on 10-year German Bunds decreased 0.02 percentage point to 2.67 per cent. Bond yields fall when prices rise.
Earlier in the day the dollar index, which measures the greenback against a basket of six peer currencies, rose 0.1 per cent, to its highest point since early December, before trading flat.
In commodities Brent crude was up 0.2 per cent at $83.40 per barrel, while US equivalent West Texas Intermediate was down 0.4 per cent at $77.24 per barrel.
- US futures rise as equities shrug off Powell warning on interest rates
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