US and European stocks reversed some of their recent gains on Wednesday as investors refocused on the effect of rising interest rates and oil prices rose in response to supply concerns and the threat of further sanctions on Russia.
The benchmark S&P 500, which had climbed almost 6 per cent over the previous five sessions, dropped 1.2 per cent. The declines were broad-based, with energy and utilities the only subsectors in positive territory.
The tech-dominated Nasdaq Composite index slipped 1.3 per cent, while Europe’s Stoxx 600 index gave up 1 per cent.
Stocks have rallied since the Federal Reserve announced its first rate rise in more than three years last week, despite the ongoing war in Ukraine and the fact the prospect of higher rates had spooked investors earlier in the year.
However, Neil Birrell, chief investment officer at Premier Miton Investors, said investor confidence remained fragile and many were choosing to cash in on their recent gains.
“At the moment everyone is taking profits where they can,” he said. “We’re cautious, for lots of reasons.”
Roger Lee, head of equity strategy at Investec, said the recent rally “was really caused by short-term asset allocation out of fixed income into equities, [and] stock markets are now refocusing on just how high interest rates might go”.
On Monday, Jay Powell, Federal Reserve chair, said the central bank needed to move “expeditiously” towards tighter monetary policy after the annual pace of US inflation hit a 40-year high of 7.9 per cent in February.
Brent crude, the international oil benchmark, rose 5.3 per cent to $121.60 per barrel, taking it about a quarter higher since February 23, the day before Vladimir Putin launched Russia’s invasion of Ukraine.
Oil exports from a crucial Russian pipeline were frozen on Wednesday, with the operator blaming storm damage. It came ahead of a visit to Europe by US president Joe Biden, who will argue for new, co-ordinated punitive measures against Moscow.
The yield on the 10-year US Treasury note, which falls when prices rise, moved 0.08 percentage points lower on Wednesday to 2.30 per cent but remained close to its highest level since May 2019. US Treasury bonds are experiencing their worst month of losses since Donald Trump became president in 2016.
In the UK, sterling dropped 0.4 per cent against the dollar to $1.32, holding a move from earlier in the session as chancellor Rishi Sunak revealed in his Spring Statement that official forecasters had lowered their economic growth predictions for this year.
UK government bonds rallied after the government announced plans to issue fewer bonds over the next year than markets had expected. The UK Debt Management Office said it planned to sell £124.7bn of gilts this year, substantially lower than the £152bn expected by banks polled by Bloomberg. The 10-year gilt yield fell 0.06 percentage points to 1.63 per cent.
In Asia, Hong Kong’s Hang Seng index added 1.2 per cent as investors took advantage of lower valuations. Chinese equities staged their worst weekly drop since 2008 earlier this month, before top economic official Liu He pledged state support for the economy and financial markets. The Hang Seng remains more than 5 per cent lower for the year.
The Japanese yen hit 121.4 against the US dollar, its latest six-year low, reflecting the Bank of Japan’s caution towards raising interest rates to battle a rare bout of inflation in the Asian nation, in contrast to the Fed’s hawkish policies.
Additional reporting by Tommy Stubbington in London