• Friday, December 01, 2023
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US stocks fall on fears over further interest rate rises


Two-year UK gilt yields fall back after rising to highest level since 2008

US stocks fell on Tuesday after the Federal Reserve warned last week it might have to raise interest rates further, prompting investors to question whether the recent Wall Street rally can last.

Wall Street’s benchmark S&P 500 slipped 0.4 per cent and the tech-heavy Nasdaq Composite was flat as US markets reopened after a federal holiday.

The S&P 500 extended its losses from the previous session, after the US central bank disappointed investors in suggesting that its historic tightening campaign was not over because inflation remained above target.

Markets expect Fed policymakers to lift rates by 0.25 percentage points at their next meeting in July, according to data compiled by Refinitiv and based on interest rate derivatives prices.

The sell-off comes after a prolonged rally on Wall Street this year, which has seen the S&P climb to its highest levels in more than 12 months and return to bull market territory, pushed by gains for artificial intelligence-related stocks.

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Yet Thomas Mathews, senior markets economist at Capital Economics, said that “growing enthusiasm about AI will [not] be enough to stop the S&P 500 from declining if [ . . . ] the US economy falls into recession later this year”.

Meanwhile, Europe’s region-wide Stoxx 600 and Germany’s Dax were both down 0.3 per cent, while London’s FTSE 100 was flat.

Raw materials stocks led losers in the region, with the Stoxx 600 Basic Resources index dropping for the fourth successive session, as investors fretted that China’s sluggish economic recovery would curb demand.

The moves came after the People’s Bank of China lowered the country’s mortgage-linked five-year loan prime rate to 4.2 per cent from 4.3 per cent, undershooting investors’ expectations of a 0.15 percentage point cut.

China’s benchmark CSI 300 stock index fell 0.2 per cent after the announcement, dragged down by losses in property stocks. The Hang Seng China Enterprises index of Hong Kong-listed mainland companies dropped 1.8 per cent.

“The risk with this incremental rate-reduction approach is that potential homebuyers will expect further mortgage reductions and therefore hold off purchases, depressing home sales activity,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

China’s policymakers also reduced the country’s one-year loan prime rate by 0.1 percentage point to 3.55 per cent in an effort to bolster growth in the world’s second-largest economy following three years of severe Covid-19 restrictions.

Goldman Sachs over the weekend lowered its estimate for China’s gross domestic product growth in 2023 to 5.4 per cent from 6 per cent, noting that a weak property market and low investor confidence continued to stall economic recovery.

In the UK, traders prepared for the release of UK inflation data on Wednesday and a monetary policy decision from the Bank of England on Thursday. Markets expect the central bank to lift rates to a 15-year high of 4.75 per cent.

The annual rate of consumer price inflation is forecast to have edged down to 8.4 per cent in May, from 8.7 per cent in April, remaining above that of Europe and the US and far exceeding the BoE’s 2 per cent target.

Yields on two-year gilts, which are sensitive to interest rate changes, fell 0.14 percentage points to 4.95 per cent, edging down after hitting their highest level since 2008 in the previous session. Yields on the benchmark 10-year note were 0.14 percentage points lower at 4.35 per cent. Bond yields rise as prices fall.