Global stocks fell on Wednesday, while a rally in the dollar gained momentum, as investor focus honed in on what the Federal Reserve may have to do to tame inflation, rather than on the recent problems in the U.S. banking sector.
The MSCI All-World index fell 0.3%, thanks to a broad-based decline in global equities.
U.S stock futures fell between 0.5 and 0.7%.
Wall Street’s banks have seen a fairly choppy reporting season so far. Morgan Stanley (NYSE:MS) reported a drop in first-quarter profit on Wednesday due to a prolonged slump in dealmaking. Some rivals have reported solid earnings, while others, such as Goldman Sachs (NYSE:GS), have taken a hit.
“So far the major banks that have reported have largely helped to settle market nerves,” said Khoon Goh, head of Asia research at ANZ in Singapore. “With those stresses easing away, markets are now back to focusing on the Fed.”
A slew of Fed speakers are in the frame over the rest of this week, while the central bank’s “beige book” of economic conditions is published on Wednesday and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.
Markets are pricing an 86% chance the Fed will raise rates by a quarter point at its May meeting, and are winding back expectations of cuts later in the year – moves that have put the brakes on U.S. dollar selling.
In an interview with Reuters on Tuesday, St Louis Fed President James Bullard said that, far from pausing, the central bank should keep raising interest rates, based on how persistent inflation has proven to be.
Still, the inversion between three-month Treasury yields and 10-year yields, at more than 160 bps, is the deepest since 1981 when the federal funds rate was retreating from peak of 19% – suggesting markets expect rates to fall.
Ten-year yields were last up 5 basis points at 3.6215%.
Earnings seasons is underway in earnest in Europe too.
Dutch-listed chip equipment maker ASML – one of the region’s most valuable companies by market capitalisation – beat first-quarter profit expectations, according to Refinitiv data.
Shares in the company fell 2.6%, which in turn contributed to a 0.3% drop in the STOXX 600 index.
As investors consider the possibility that the Fed may well have to raise rates even more, the U.S. dollar has found some support, but data shows the pressure is also on other central bankers to do something about inflation.
UK inflation fell to 10.1% in March, from February’s 10.4% – above expectations for a decline to 9.8% and the highest in western Europe, according to data on Wednesday.
Sterling rose by as much as 0.8% earlier in the day, but came under pressure against the dollar, which extended gains. The pound was last down 0.3% at $1.2394 and up 0.2% against the euro at 88.15 pence.
“This fact, along with the stronger than expected wage growth data yesterday, provide compelling reason for the BoE (Bank of England) to now hike by 25bps at the next meeting on 11th May,” MUFG chief strategist Derek Halpenny said, on the inflation figures.
The euro hit a one-year high above $1.10 last week and was down 0.5% at $1.0923.
Commodities took a hit from the strength of the dollar. Brent crude fell 2% to $83.00 a barrel, roughly where they have traded for a few weeks since OPEC+ announced surprise production cuts. Copper dropped 1.3% on the London Metal Exchange to $8,898 a tonne, while gold fell 1.7% to $1,971 an ounce.