European stocks fall as markets price in sharper US rate rises

European stocks slipped lower in choppy trading on Tuesday, following a global equity rout in the previous session as expectations of extra-sharp rate rises by the US Federal Reserve plunged Wall Street into a bear market.

The Stoxx Europe 600 share index was down 1.1 per cent by the late morning in London, having climbed almost 1 per cent in early dealings. The decline put the regional gauge on track for its sixth straight day of losses. London’s FTSE 100 lost 0.9 per cent.

Meanwhile, US stock futures hinted Wall Street stocks may stabilize after the day of sharp selling. Contracts tracking the S&P 500 edged 0.2 per cent higher. The blue-chip equity gauge on Monday tumbled almost 4 per cent to close at its lowest level since the start of 2021 – down more than a fifth from its all-time high in January – as analysts ratcheted up their forecasts for how aggressively the Fed would tighten monetary policy.

Data last Friday showed US consumer price inflation hit an unexpectedly high annual pace of 8.6 per cent in May, with Russia’s invasion of Ukraine stoking higher food and fuel costs.

Markets have now almost fully priced in a 0.75 percent point rate rise by the Fed at the conclusion of its June policy meeting on Wednesday. Economists at JPMorgan, Goldman Sachs and Barclays all anticipate a 0.75 percent point rise – which would be the first since 1994.

On Tuesday, money markets were pricing expectations for the benchmark US federal funds rate to climb to 3.6 per cent by the end of this year, compared with the current range of between 0.75 and 1 per cent.

“The thought process across the market a few weeks ago was that we had hit peak inflation, but then last month’s number came out,” said Randeep Somel, portfolio manager at M&G.

“The concern is we are moving into 1970s style stagflation,” he said, referring to a scenario where consumer prices rise and economic growth falters. “You’re starting to see value in equity markets, but whether we’ve hit bottom, that’s incredibly hard to time.”

“I don’t think we’re actually at peak fear yet,” said Ross Mayfield, investment strategist at RW Baird. Short-term recoveries in risk assets “feel like classic bear market rallies”, he said. “I just don’t think the market is going to believe in peak inflation until we actually see it has peaked, and there’s probably another leg lower for markets.”

Anticipation of sharper US rate rises has also driven up yields on government debt, which rise when bond prices fall. On Tuesday, the yield on the 10-year US Treasury declined 0.07 percentage points to 3.3 per cent, having on Monday touched its highest level since 2011.

A move by the European Central Bank last week to pave the way for its first rate rise since 2011 has also pressured the debt markets’ financially weaker eurozone nations. The yield on Greece’s 10-year bond rose by more than 0.3 percentage points to 4.66 per cent on Tuesday, its highest in more than three years.

The jump in expectations of central bank rate rises has also battered more speculative asset classes, including tech companies and crypto assets.

The technology-heavy US Nasdaq Composite share index closed Monday’s session down 4.7 per cent, taking year-to-date losses to more than 30 per cent. Bitcoin briefly dipped below $ 21,000 on Tuesday, later trading at just over $ 22,500 – down more than 20 per cent from last Friday.

In Asia, China’s CSI 300 recovered losses earlier in the session to add 0.8 per cent on the day. Japan’s Topix closed down 1.2 per cent and Australia’s benchmark S & P / ASX 200 index closed 3.6 per cent lower.

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