(Bloomberg) — US equity futures and European stocks dropped in the face of hawkish comments from Federal Reserve and European Central Bank officials that ramped up investors’ expectations of higher interest rates. The dollar rallied and bonds fell.
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Contracts for both the S&P 500 and Nasdaq 100 retreated after the underlying indexes sank more than 1% on Thursday. DoorDash Inc. jumped in premarket trading as the food delivery company’s results showed resilient demand. Moderna Inc. fell following mixed results for a flu vaccine candidate. Rates-sensitive technology stocks led declines in Europe’s Stoxx 600 index. Natwest Group Plc slumped after the British lender’s guidance disappointed some investors.
The Bloomberg dollar gauge rose as much as 0.6%, erasing its losses for the year, while benchmark Treasury yields climbed for a fourth day, with two-year and 10-year yields both at their highs for 2023. Data on Thursday showed that US producer prices rebounded in January by the most since June.
Federal Reserve Bank of Cleveland President Loretta Mester said she had seen a “compelling economic case” for rolling out another 50 basis-point hike, and St. Louis President James Bullard said he would not rule out supporting a half-percentage-point increase at the March meeting. European Central Bank Executive Board member Isabel Schnabel warned that markets risked underestimating inflation.
“It’s taken a lot but it would appear investors’ eternal optimism is being shaken, with the latest PPI figures finally driving the message home that bringing the economy in for a soft landing will be extraordinarily challenging and there’ll likely be plenty of turbulence along the way,” said Craig Erlam, senior market analyst at Oanda Europe.
Investors have been upping their bets on how far the Fed will raise rates this tightening cycle. They now see the federal funds rate climbing past 5.2% in July, according to trading in the US money markets. That compares with a perceived peak rate of 4.9% just two weeks ago.
Interest rate expectations are also rising in Europe, with money markets bolstering ECB rate-hike bets after Schnabel’s remarks. Traders have almost baked in a 3.75% terminal deposit rate by September and reduced wagers on cuts in 2023 to the lowest since mid-December. German and UK bonds fell.
Schnabel said investors risk underestimating the persistence of inflation, and the response needed to bring it under control. “We are still far away from claiming victory,” she said in an interview with Bloomberg, citing the strength of underlying price pressures and faster wage increases.
On the outlook for US equities, Bank of America Corp. strategists wrote that the delayed arrival of a recession will weigh on stocks in the second half of the year, noting that a resilient economy thus far means interest rates will stay higher for longer.
A BofA team led by Michael Hartnett is among those predicting a scenario known as “no landing” in the first half of the year, where economic growth will stay robust and central banks will likely remain hawkish for longer. That will probably be followed by a “hard landing” in the latter part of 2023, they wrote.
An Asian stock benchmark dropped for a third straight week, the worst such run of losses since October. China Renaissance Holdings Ltd. fell as much as 50% in Hong Kong, the most ever, after saying that it was unable to contact Bao Fan, chairman, chief executive officer and controlling shareholder of the Chinese investment bank. The development fueled speculation of a renewed crackdown on China’s finance industry.
Bitcoin retreated after three days of gains that were fueled by easing fears of a US regulatory crackdown. Cryptocurrency-exposed stocks fell in New York premarket trading, with Coinbase Global Inc., Riot Platforms Inc. and Stronghold Digital Mining Inc. among those in decline.
In commodities, oil headed for a weekly drop as rising US inventories and the prospect of further tightening by the Federal Reserve eclipsed the lift from more signs that Chinese energy demand is improving. Gold fell.
Some of the main moves in markets:
S&P 500 futures fell 0.8% as of 6:06 a.m. New York time
Nasdaq 100 futures fell 1.1%
Futures on the Dow Jones Industrial Average fell 0.6%
The Stoxx Europe 600 fell 0.7%
The MSCI World index fell 0.4%
The Bloomberg Dollar Spot Index rose 0.5%
The euro fell 0.4% to $1.0636
The British pound fell 0.5% to $1.1936
The Japanese yen fell 0.8% to 134.98 per dollar
Bitcoin fell 3.1% to $23,765.46
Ether fell 1.1% to $1,664.27
The yield on 10-year Treasuries advanced four basis points to 3.90%
Germany’s 10-year yield advanced five basis points to 2.53%
Britain’s 10-year yield advanced seven basis points to 3.56%
West Texas Intermediate crude fell 2.6% to $76.43 a barrel
Gold futures fell 1% to $1,832.80 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Tassia Sipahutar.
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