By Huw Jones
LONDON (Reuters) – European stocks fell on Thursday as cautious investors continued to assess how far and fast the U.S. Federal Reserve will begin raising interest rates this year.
Also keeping a lid on risk taking were the tech-laden U.S. Nasdaq entering correction territory on Wednesday, a sell-off in bonds, still elevated crude oil prices and increased political tensions over Ukraine.
But Chinese stocks were a bright spot after the country cut benchmark mortgage reference rates to ease pressure on its property sector.
The STOXX index of 600 European companies was down 0.17% at 480 points, below its life-time high of 495.46 points hit in the first week of trading this year. Blue-chip indexes in Frankfurt, Paris and London were all lower.
Gains in Asia helped to counter the pullback in Europe to keep the MSCI all country stock index in positive territory, up 0.16% at 728 points, but still down about 3.8% so far this year.
“There is a tonne of caution now,” said Seema Shah, chief strategist at Principal Global Investors.
“The key factor that markets are thinking about is Fed tightening,” she said.
Rising U.S. interest rates could dent global growth prospects and the earnings outlook for international companies.
A Reuters poll of economists showed they expect the Fed to tighten monetary policy at a much faster pace than thought a month ago to tame high inflation.
Shah said the year opened with elevated valuations in markets and the sell-off in bonds since then has fuelled a growing sense of caution as markets ask if they have priced in enough Fed rate hikes.
“That’s what’s driving a lot of the caution at the moment. Even with four hikes, the question is, is that enough and should we get ahead of this continued forecasting that we have been seeing,” Shah said.
European Central Bank head Christine Lagarde said euro zone inflation will decrease gradually over the year, adding that the ECB did not need to act as boldly as the Fed because of a different economic situation.
Analysts said global growth still remained solid but investors wanted reassurance of that in the earnings season now unfolding.
ASIA PERKS UP, UKRAINE EYED
Asian share markets broke a five-day slide, pushing higher on Thursday as China underscored its diverging monetary and economic picture by cutting benchmark mortgage rates.
China’s blue-chip CSI300 index rose 0.9% on the day. Shares of Chinese property developers boosted gains in the broad index amid hopes that government measures would help ease a funding squeeze in the embattled sector, even as another developer warned of default.
Seoul’s Kospi rose 0.7% and Australian shares gained 0.14%. In Tokyo, the Nikkei added 1.11%.
Analysts at ING said geopolitical risks, notably the possibility of Russia invading Ukraine, could continue to weigh on global shares, adding to existing pressure from the rising rates outlook.
U.S. President Joe Biden predicted on Wednesday that Russia will make a move on Ukraine, saying a full-scale invasion would be “a disaster for Russia” but suggesting there could be a lower cost for a “minor incursion.”
“Markets may soon start to take into account a greater risk of a conflict flare-up between Russia and Ukraine, which is one reason why stocks may continue to sell and why Treasury yields aren’t on a one-way ticket higher,” ING said.
Fed rate hike worries pushed U.S. Treasury yields to two-year highs on Wednesday, and taking Germany’s 10-year yield into positive territory for the first time since May 2019.
On Thursday U.S. yields edged up, but remained below their highs in the previous session.
The benchmark U.S. 10-year yield rose to 1.839% from a U.S. close of 1.827%, and the policy-sensitive two-year yield touched 1.0433% compared with a U.S. close of 1.025%.
The pause in Treasury yields’ march higher kept the greenback in check, with the dollar index, which measures the greenback against six major peers, edging down to 95.527 as commodity currencies benefited from high oil prices.
The U.S. dollar traded little changed against the Japanese yen at 114.21 and, and rose 0.06% against the euro to $1.1350.
In commodity markets, oil prices eased off elevated levels after touching their highest levels since 2014 on Wednesday on strong demand and short-term supply disruptions.
Global benchmark Brent crude was last down 0.9% at $87.58 per barrel and U.S. crude fell 0.3% to $86.68 per barrel. [O/R]
Gold paused after marking its best session in three months a day earlier. Spot gold was little changed at $1,840 an ounce.
(Additional reporting by Andrew Galbraith; Editing by Simon Cameron-Moore, Gerry Doyle and Susan Fenton)