European equities rose on Tuesday, after a wild ride on Wall Street, as the prospects of the US central bank reversing its pandemic-era monetary stimulus caused volatility in global markets.
The Stoxx Europe 600 index gained 1 per cent in early trade, having rebounded from a 3.8 per cent fall in the previous session. This was followed by a sharp turnaround on Wall Street, where the benchmark S&P 500 index briefly fell into a correction zone before reversing its losses as traders took advantage of the sharp decline to buy discounted shares.
Bargain hunters stayed ashore in the Asia-Pacific. Hong Kong’s Hang Seng stock index fell 2 per cent as Chinese tech companies fell. Wall Street stock futures traded fresh later in the day, with the tech-heavy Nasdaq 100 down 1.3 percent, while the S&P 500 lost 0.8 percent.
The FTSE All World Index of developed and emerging market stocks is down more than 6 per cent this month – leaving it on track to record its worst month since 2020 – as investors took a sharp stance by the US Federal Reserve. which is expected to hike interest rates four times this year to tackle rising inflation.
The change in stance has come as the world’s most influential central bank is expected to limit borrowing costs to near zero and ease financial conditions through the pandemic, boosting stock markets and reducing investor appetite for speculative assets. The amount has come after purchasing Treasury and other debt instruments.
Valuations have fallen in Wall Street, with the forward price-to-earnings ratio on the S&P 500 falling from 23 in June to nearly 19, as investors anticipate higher interest rates that could cut the present value of companies’ future cash flows. We do.
Shares in technology groups, which make up the bulk of the two main US indices and are often not expected to produce peak gains for years into the future, have been particularly volatile.
“You naturally see the most compression in companies that post short-term near-term gains and where cash flow has been out for several years,” said Grace Peters, head of investment strategy for Europe at JPMorgan’s private bank.
The Nasdaq fell as much as 4.9 percent on Monday, hitting the close of a bear market defined by a 20 percent drop from its all-time high, before rebounding later in the session. A measure of expected volatility on the S&P 500, Wix, which has a long-term average of around 20 points, peaked at 38.4 on Monday and remained above 32 on Tuesday.
Some analysts are skeptical that the Fed may end its two-day meeting by calming fears of a faster rate hike that could hit economic growth.
“The market has gotten a little bit ahead of itself,” said Jorge Garayo, global head of inflation strategy at Société Générale. “This meeting will be about pushing back against further hikes in prices,”
US Treasury prices eased on Tuesday, after consolidating in recent days as traders took shelter from stock market volatility. The yield on the benchmark 10-year Treasury, which moves inversely to its price and set the tone for debt pricing around the world, rose 0.06 percentage points to 1.79 percent.
Germany’s par Bund yield was flat at less than zero. The dollar index, which measures the US currency against six others, was stable.
Unhedged – Markets, Finance and Strong Opinions
Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds react to them. Sign up here to have newsletters sent straight to your inbox every day of the week