US and European stocks fell as traders expected central banks on both sides of the Atlantic to raise interest rates to curb inflation.
In New York, the base stock index S&P 500 fell 2.1% in afternoon trading, heading for a third consecutive weekly loss. The marker closed 1.5% lower on Thursday after Federal Reserve Chairman Jay Powell said raising the interest rate by 0.5 percentage points was “on the table” in a bid to fight rising inflation.
The tech Nasdaq Composite lost 2 percent, on the verge of a weekly loss of more than 3 percent as investors withdrew from growth stocks as inflation expectations rose.
US 10-year profitability – a closely monitored indicator of market inflation expectations for the next decade – rose to 3.08% on Friday, its highest level in at least two decades.
Meanwhile, Cboe’s Vix Volatility Index, which measures expected fluctuations in the S&P 500 and is known as Wall Street’s “measure of fear,” climbed to a one-month high of 27.2 percent, or 20 percent.
Following a broad sell-off in the US government bond market on Thursday, the two-year US bond yield, which tracks interest rate expectations, added 0.03 percentage points to 2.71%. Banknote yields have repeatedly reached new three-year highs this week.
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The yield on 10-year government securities – which are at the heart of global borrowing costs – was stable at 2.9%, also close to its highest level since the end of 2018.
The European regional stock index Stoxx 600 closed 1.8% lower as the specter of higher euro area borrowing costs weighed on companies’ earnings prospects, bringing the year’s loss to more than 7%.
“There is growing hate rhetoric from central banks,” said Axel Bothe, a global strategist at Ostrum Asset Management. “They need to cut spending, promote credit rationing and put the brakes on significantly to reduce inflation.
On Thursday, Powell sent out his strongest signal so far that the Fed will quickly raise borrowing costs to fight the highest increase in consumer prices in the United States in 40 years. “I think it’s appropriate to move a little faster,” he told an IMF panel.
Meanwhile, the vice-president of the European Central Bank, Luis de Gindos, told Bloomberg that, according to the data, the first increase in interest rates in the eurozone in more than a decade is “possible” from July.
Yields on two-year German bonds, which tracked eurozone interest rate expectations, rose 0.9 percentage points to 0.27 percent, their highest level since September 2013, rising sharply from almost zero in early March. Bond yields increase when their prices fall.
Markets are now priced at an interest rate of federal funds – the central bank’s key interest rate – from 2.8% by the end of the year, compared to between 0.25% and 0.5% at the moment.
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In foreign currency, sterling fell 1.5% against the dollar to $ 1.283 – its weakest since late 2020 – after official figures showed that retail sales in the UK fell sharply in March as high inflation exacerbate the crisis with the cost of living. The downturn came after the Financial Times reported that the UK government was preparing legislation that would allow it to break the Northern Ireland Protocol, jeopardizing the post-Brexit trade agreement with the EU.
“This is the perfect storm for sterling,” said Nicola Morgan-Brownsell, manager of a fund with multiple assets in Legal & General Investment Management. “A large amount [of the fall] These are weak retail figures, but the risk of Brexit is also back in the headlines. ”
The dollar index – which tracks greenbacks against a basket of world currencies – rose 0.6%.
In Asia, China’s CSI 300 added 0.4% after the national securities regulator called on local banks and insurers to support the stock market. Japan’s Topix fell 1.2 percent.
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