European shares fell on Friday, following declines in Asia, after surging US inflation focused traders’ minds on how the end of pandemic-era monetary stimulus may pressure equity markets.
The regional Stoxx 600 Europe index declined 0.6 per cent in morning dealings and London’s FTSE 100 traded flat. In Hong Kong, the Hang Seng share gauge lost 0.2 per cent and Japan’s Nikkei 225 closed 1.3 per cent lower.
Futures markets implied the blue-chip S&P 500 share index would rise 0.1 per cent in early New York dealings, following a 1.4 per cent fall on Thursday.
Inflation figures on Wednesday revealed that US consumer prices rose by an annual 7 per cent in December, their fastest pace in almost four decades. A day later, separate figures showed that US wholesale prices rose at 9.7 per cent in December, the most since this measure of what businesses pay suppliers was first calculated in 2010.
“If inflation heads higher then the fear factor really does come in,” said Aneeka Gupta, research director at ETF provider WisdomTree.
Officials at the US Federal Reserve, whose main funds rate affects borrowing costs and stock market valuations worldwide, have also signalled their support for the first interest rate rise of the pandemic era in March.
Swaps markets have priced in a gradual pace of increases, with the funds rate ending the year at 1 per cent or below. But equity investors who enjoyed double-digit gains in the past two years are querying whether such projections are too optimistic.
“The markets are in this period of transition which of course always goes with some doubts,” added Geraldine Sundstrom, a managing director and portfolio manager at Pimco.
“We are moving from a time where inflation was deemed transitory and central banks would remain accommodative as far as the eye could see to a time when it is natural to expect some removal of monetary accommodation, but how much that should be is the big question mark for everyone,” she added.
The Stoxx technology sub-index was one of the worst performers in Europe on Friday, dropping 1.4 per cent. This followed a 2.5 per cent fall for Wall Street’s Nasdaq Composite gauge in Thursday’s session.
Ultra-low interest rates can boost tech and other high-growth stocks by lowering the discount rate professional investors use to value equities, which in turn makes cashflows expected far into the future more valuable.
“When interest rates are very low, tech valuations get bloated,” WisdomTree’s Gupta said. “As interest rate expectations start to rise,” she added, “these valuations come off”.
In government debt markets, the yield on the US 10-year Treasury note, which moves inversely to its price, added 0.04 percentage points to 1.75 per cent. The yield on the two-year Treasury note, which closely tracks interest rate expectations, rose 0.03 percentage points to 0.93 per cent.
The dollar index, which measures the greenback against six other currencies, traded flat.
In an indication that Russian geopolitical tensions were beginning to seep into financial markets, Moscow’s benchmark Moex stock index was down 1.8 per cent, taking its weekly decline to more than 4 per cent.
Brent crude, the oil benchmark, added 1.3 per cent to $85.57 a barrel. – Copyright The Financial Times Limited 2022