LONDON, May 18 – A recovery in equities ran out of steam on Wednesday as worries about the outlook for economic growth and rising inflation weighed on sentiment, while a UK inflation reading of 9% underscored how much higher interest rates are on the horizon could.
Asian stocks managed to post their fourth straight session of gains, but stocks in Europe were mixed and futures on Wall Street pointed to a weaker open.
Many analysts have described this week’s sharp rally as a short-term rebound, common during a prolonged downtrend in equities. With so much macroeconomic uncertainty, few are willing to predict the end of selling for risky assets after the first five months of the year.
“Investor sentiment and confidence remain volatile and as a result, until we get further clarity on the 3Rs – interest rates, recession and risk – we are likely to see volatile and choppy markets,” said Mark Haefele, chief investment officer at UBS Global Wealth Management .
As of 08:10 GMT, the broad Euro STOXX 600 (.STOXX) is down 0.1%, while the UK FTSE 100 (.FTSE) is also down 0.1%.
MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) rose 0.6% and is on its longest winning streak since February. Japan’s Nikkei (.N225) is up 0.94% and miners led Australian shares (.AXJO) about 1% higher.
The MSCI World Equity Index (.MIWD00000PUS) is up 0.1% and is nearly 2% higher so far this week, but remains 16% below its January peak.
Stock Index MSCI World
In FX markets, sterling was the big loser, shedding 0.9% to $1.2387 after UK consumer price inflation hit 9% in April, a 40-year high and roughly in line with analysts’ expectations. The pound was up sharply this week and part of Wednesday’s decline was due to profit taking.
UK inflation is now the highest among major economies, but prices are rising rapidly around the world, forcing central banks to embark on a series of rate hikes even as economic growth momentum slows.
Canada’s April inflation data is also due later on Wednesday.
The US dollar rose 0.3% to 103.61, getting closer to its two-decade high set last week, while the euro fell a similar amount to $1.0515.
NEGATIVE SHOCKS
Positive data had supported near-term sentiment, with US retail sales in line with forecasts for a solid increase in April and industrial production beating expectations. Continue reading
Data on Wednesday showed that Japan’s economy contracted less-than-expected in the first quarter. Continue reading
Shanghai is also nearing the end of its protracted lockdown, and China’s vice premier made dovish comments to tech leaders in the latest sign of the pressure easing. Continue reading
However, all the good news was offset by Federal Reserve Chair Jerome Powell’s reminder that controlling inflation would require rate hikes and possibly some pain. Continue reading
Investors have priced in US interest rate hikes of 50 basis points in June and July and expect the Fed’s interest rate to rise 3% by early next year.
US Treasury yields remained stable on Wednesday, below recent multi-year highs, but the German 2-year government bond yield rose to its highest level since December 2011 after more hawkish central bank comments. The European Central Bank’s Klaas Knot said on Tuesday that a 50 basis point rate hike in July was possible if inflation widens.
Commodities rallied alongside equities this week as markets have found reasons to keep growth hopes alive, although most prices are below recent highs.
On Wednesday, Brent crude futures were up 1.3% to $113.38 a barrel and US crude futures were up 1.64% to $114.24 a barrel.
S&P Global Ratings lowered growth forecasts for China, the United States and the eurozone, underscoring the weaker outlook for the world’s major economies.
“The world economy continues to face an unusually large number of negative shocks,” said Chief Economist Paul F. Gruenwald.
“Two developments have changed the macro picture,” he said, citing Russia’s invasion of Ukraine and inflation that has turned out to be higher, broader and more persistent than first thought.
Additional reporting by Tom Westbrook in Singapore; Edited by Kim Coghill
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