The prospect of even higher US interest rates is lifting the dollar against the euro
London (AFP) - European stocks closed lower Wednesday and Wall Street slipped back from early gains on expectations that inflation will keep US interest rates high, which also drove investors to seek safety in the dollar.
Asian markets had managed to rebound from heavy selling on both sides of the Atlantic on Tuesday, but analysts said prospects that central bankers will feel forced to keep monetary policy tight are spurring cautious positions.
A report Wednesday showing a larger-than-expected rise in US manufactured goods orders for August added to the cautious tone, since they give the Federal Reserve less reason to lower rates anytime soon.
“Good data is very much ‘bad news’ for stocks right now, as it means there is no pressure on the Fed or other central banks to think about loosening policy,” said Chris Beauchamp, chief market analyst at the trading platform IG.
“High rates are going to be a feature well into 2024, absent a recession which, as yet, refuses to appear on the horizon,” he said.
Oil prices extended their march higher in the wake of extended output cuts announced by Saudi Arabia and Russia this month, fuelling the inflation concerns.
- More downside? -
The Fed indicated last week that another rate increase could be on the cards before year’s end, while its boss Jerome Powell and other board members have said they could keep borrowing costs elevated for an extended period, with fewer cuts than hoped in 2024.
City Index analyst Fawad Razaqzada said equities were at risk of further losses.
“If anything, stock market investors have been slow to react to the macro risks compared to foreign exchange and bond markets. This means that there is more room to the downside,” he said.
The dollar added to gains seen as higher US bond yields make the greenback more attractive as a haven, putting further pressure on the euro and pound.
It also struck an 11-month peak against the yen, sparking speculation of new Bank of Japan intervention into the foreign exchange market to keep its currency from falling further.
- ‘Fear gauge’ spike -
Analysts said a spike in US Treasury yields – an indicator of future rates – was causing widespread unease in trading rooms, particularly with corporate earnings season looming, when CEOs often indicate if full-year profit forecasts will be met or not.
In a sign of the worry among investors, the VIX “fear gauge” of volatility in the options markets is at its highest level since late May, following data that showed a bigger-than-expected drop in US consumer confidence owing to higher gasoline and food prices.
Traders are also keeping tabs on Washington, where a standoff between lawmakers over a budget bill threatens to cause a government shutdown, which Moody’s has warned could have a negative impact on the country’s credit rating.
Senators from both parties drafted a last-ditch short-term proposal Tuesday – with a September 30 deadline for a deal – that would keep the government running until November 17.
But there was no immediate indication that the warring factions of House Republicans, who have forced the showdown over government funding, would take it up if passed in the Senate.
- Key figures around 1545 GMT -
New York - Dow: DOWN 0.3 percent at 33,534.57 points
London - FTSE 100: DOWN 0.4 percent at 7,593.22 (close)
Frankfurt - DAX: DOWN 0.3 percent at 15,217.45 (close)
Paris - CAC 40: FLAT at 7,071.79 (close)
EURO STOXX 50: FLAT at 4,131.68 (close)
Tokyo - Nikkei 225: UP 0.2 percent at 32,371.90 (close)
Hong Kong - Hang Seng Index: UP 0.8 percent at 17,611.87 (close)
Shanghai - Composite: UP 0.2 percent at 3,107.32 (close)
Euro/dollar: DOWN at $1.0522 from $1.0572 on Tuesday
Pound/dollar: DOWN at $1.2147 from $1.2158
Dollar/yen: UP at 149.41 yen from 149.07 yen
Euro/pound: DOWN at 86.63 pence from 86.95 pence
Brent North Sea crude: UP 2.2 percent at $94.44 per barrel
West Texas Intermediate: UP 3.5 percent at $93.52 per barrel