European equities fell, following weeks of losses, as central banks’ tightening monetary policy and the war in Ukraine continued to darken the market mood.
The regional Stoxx Europe 600 share index, which has ended the past three weeks in the red, fell 0.6 per cent in early dealings. London’s FTSE 100 dipped 0.3 per cent and Germany’s Xetra Dax lost 0.2 per cent. A FTSE index of Asia Pacific shares, excluding Japan, dropped 1.3 per cent.
The dollar index, which measures the US currency against six others and tends to rise when appetite for riskier assets falls, scaled a fresh 20-year high.
The moves came after US stock markets closed out their longest streak of weekly losses since 2011, after the Federal Reserve last week raised its main interest rate by 0.5 percentage points to battle soaring inflation.
Rate rises last week from central banks in the UK, India and Australia also overshadowed progress that companies have reported during the quarterly earnings season.
“Headwinds from higher bond yields, higher inflation, recessionary fears and geopolitics have all [weighed] on the market,” Citi equity strategist Beata Manthey said. And while more than two-thirds of European companies that have reported quarterly results so far have topped analysts’ forecasts, “we worry that this may not endure,” she said, citing the “weakening macro environment”.
The yield on the 10-year US Treasury note rose 0.05 percentage points to 3.17 per cent, continuing months of losses for global bond investors as expectations of higher interest rates on cash reduced the appeal of fixed income-paying debt instruments. The yield on the five-year US Treasury note also rose 0.05 percentage points to 3.1 per cent, its highest level since 2008.
Investors are now struggling to assess how far the world’s most influential central bank may continue raising rates and whether it will rein back its tightening efforts to safeguard financial markets.
“It’s going to take a fairly sizeable risk-off move to get the Fed to re-pivot dovish,” David Zervos of investment bank Jefferies said. Fed chair Jay Powell, he added, “is not about to go down in history as the central bank chair who blew 40 years of hard-earned inflation-fighting credibility”.
Futures trading implied Wall Street’s S&P 500 share index would open 0.8 per cent lower. Contracts tracking the technology-heavy Nasdaq 100 also fell 0.8 per cent.
In currencies, the euro dropped 0.4 per cent against the dollar to just over $1.05. Sterling fell 0.5 per cent to just over $1.22, its weakest since June 2020.
“With investors focused on the growing threat of a eurozone recession,” Nick Andrews of Gavekal Research said, “it is hard to see what may spark a euro rally.”
On Monday, Japan joined other G7 countries in pledging to ban or phase out Russian oil imports. The EU is discussing similar sanctions, although discussions have stumbled over objections from Hungary.
Brent crude, the international benchmark, dipped 1 per cent lower to $111 a barrel.