By Ritvik Carvalho
LONDON (Reuters) – Global stocks recovered some losses after hitting a four-week low on Monday as investors continued to digest last week’s surprise hawkish shift by the U.S. Federal Reserve, while the dollar stood just below a 10-week high.
Shares of banks, energy firms and other companies that tend to be sensitive to the economy’s fluctuations have fallen sharply since the Fed’s meeting on Wednesday, when the central bank caught investors off guard by anticipating two quarter-percentage-point rate increases in 2023.
Stocks in Asia took their cue from Wall Street’s falls on Friday but European shares bucked the trend, with the pan-European STOXX 600 index up 0.2% by afternoon trade in London. [.EU]
U.S. stock futures also moved firmly into positive territory, suggesting gains at the open on Wall Street later in the day. S&P 500 E-mini futures were up [.N]
“The interesting part about this correction is that it was lagged, so it took a while for the market to sort through the news,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.
“The situation in reality is actually pretty good – the Fed is stabilizing inflation…Cyclical sectors may have overshot the market in the short term and so you may have a bit of pressure on the sector.”
Britain’s FTSE 100 was down 0.1%, France’s CAC 40 index gained 0.3% and Spain’s IBEX 35 fell 0.3%. Germany’s DAX was up nearly half a percent, while Italy’s FTSE MIB index rose 0.2%.
MSCI’s All Country World Index, which tracks shares across 49 countries, was down 0.2%, trimming some losses after hitting its lowest since May 24.
Benchmark 10-year U.S. Treasury yields recovered to 1.4414% after falling to their lowest since Feb. 24 at 1.3540%.
The yield curve – measured by the spread between two- and 30-year yields – earlier hit its flattest since late January, and as investors brought forward rate hike expectations while lowering the longer-term outlook for growth and inflation.
The U.S. dollar index hovered just below the 10-week high of 92.408 touched on Friday, following its biggest weekly advance in more than a year.
“Last week’s dollar rally is a combination of expectations and positioning (sold dollars), a concern that the Fed is ‘behind the curve’ (and therefore must do more and earlier than expected), and that stock markets have started to lose ground which makes the dollar strengthen as the most defensive currency,” Filip Carlsson, junior quantitative strategist at SEB, said in a morning note.
“We still see this as a correction and not the beginning of a new trend.”
St. Louis Fed President James Bullard further fuelled the sell-off on Friday by saying the shift toward faster policy tightening was a “natural” response to economic growth and particularly inflation moving quicker than anticipated as the country reopens from the coronavirus pandemic.
“The Fed’s pivot to begin the tightening discussion caught most by surprise, but markets began discounting this inevitable process months ago in our view,” Morgan Stanley analysts wrote in a report.
“It’s exactly what the mid-cycle transition is all about, and fits nicely with our narrative for choppier equity markets and a 10-20% correction for the broader indices this year.”
Earlier in Asia, Japan’s Nikkei led declines with a 3.6% drop and dipped below 28,000 for the first time in a month, while MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.4%. Chinese blue chips lost 0.7%.
Several Fed officials have speaking duties this week, including Chair Jerome Powell, who testifies before Congress on Tuesday. European Central Bank President Christine Lagarde speaks before the European Parliament on Monday.
The euro traded above its lowest against the dollar since April 6 at $1.1896 on Monday, dropping from as high as $1.21457 last Tuesday.
Sterling recovered some ground, to trade 0.6% higher at $1.3880 after sliding to its lowest since April 16 on Friday. [GBP/]
Commodity-linked currencies have also suffered, with the Australian dollar hovering above a six-month low at $0.7495.
A stronger greenback has pressured cryptocurrencies too, with bitcoin falling 10% to around $31,930, while smaller rival ether lost 15% to around $1,903.
In commodities, gold rebounded 1.1% to $1,783 an ounce on Monday, looking to snap a six-day losing streak, but remained near the lowest since early May.
Three-month copper on the London Metal Exchange fell to its lowest since April 15, following an 8.6% drop last week, the biggest weekly fall since March 2020.
Crude oil rose for a second day, underpinned by strong demand during the summer driving season and a pause in talks to revive the Iran nuclear deal that could indicate a delay in resumption of supplies from the OPEC producer.
Brent crude futures rose 0.1% to $73.56 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 0.1% to $71.74 a barrel.
(Reporting by Ritvik Carvalho; Additional reporting by Kevin Buckland in Tokyo; Editing by Catherine Evans and Peter Graff)