US stocks fell for a second consecutive week after investors heard hawkish messages from central banks in the US and Europe that set expectations that interest rates would remain higher for longer.
Wall Street’s S&P 500 fell 2.1 per cent on the week, including a 1.1 per cent drop in Friday’s session. The tech-heavy Nasdaq Composite closed 1 per cent lower on Friday, taking its drop for the week to 2.7 per cent.
Friday’s session had the largest expiry of options in two years in an event known as triple-witching, which typically boosts trading volumes and volatility.
Europe’s Stoxx 600 fell 1.2 per cent and London’s FTSE 100 lost 1.3 per cent.
The moves come after a week in which the Federal Reserve, the Bank of England and the European Central Bank all slowed the pace of their interest rate rises while warning that further tightening of monetary policy would be required.
Financial markets had been left “awestruck” by the hawkishness of various central banks, said Agnès Belaisch, chief European strategist at the Barings Investment Institute. “This is emerging market-type repricing post a central bank meeting, it’s wild.”
Economists think inflation has peaked in the US, UK and Europe but any good news was this week overshadowed by grim forecasts of slowing economic growth and higher unemployment.
Yields on longer-dated government bonds in the US and Germany have dipped below yields on shorter-dated notes, indicating a slowdown on the horizon in both regions.
The yield on the two-year German government bond, which moves with rate expectations, on Friday rose as high as 2.5 per cent, its highest level since 2008. Yields rise as prices fall.
“While other major central banks have started to prepare for the end of their hiking cycles, the ECB is giving the impression that it has just got started,” said Carsten Brzeski, global head of macro at ING.
The central bank’s message that interest rates were set to rise “significantly” at a steady pace amounted to a “hawkish pivot” and suggested “the last doves must have left the ECB building”, Brzeski added.
Even so, data out on Friday showed the downturn in eurozone manufacturing and services activity eased more than expected in December, with S&P Global’s flash eurozone composite purchasing managers’ index rising to 48.8 in December from 47.8 in the previous month. A score below 50 indicates a majority of businesses reported a contraction over the previous month.
UK business activity slowed for the fifth consecutive month in December, with the country expected to tip into recession “for a prolonged period”, according to BoE governor Andrew Bailey.
Oil prices slipped, with Brent crude, the international oil benchmark, settling down 2.4 per cent at $79.04 a barrel. US benchmark West Texas Intermediate fell 2.4 per cent to $74.29 a barrel.
Natural gas prices fell sharply as temperatures were forecast to rise in late December, with Dutch TTF gas futures, the benchmark European contract, down 12 per cent to €117.50/MWh.
In currency markets, the dollar rose by 0.2 per cent against a basket of six other currencies after volatile trading in the previous session.
Asian stocks were mixed, with Hong Kong’s Hang Seng index up 0.4 per cent, Japan’s Topix down 1.2 per cent and South Korea’s Kospi flat. China’s CSI 300 was unchanged.
