European equities partially recovered from their steepest drop in more than two months in the previous session, when fears of monetary policy tightening by central banks delivered the worst day on Wall Street since May.
The Stoxx Europe 600 index opened 0.7 per cent higher after losing 2.2 per cent on Tuesday. Global government bond yields, which track interest rate expectations, were mostly flat in early European trading after climbing rapidly on Tuesday.
Tuesday’s market downturn came after policymakers at the US Federal Reserve and Bank of England indicated last week that interest rate rises could come sooner than markets had expected due to persistently high inflation.
These fears were exacerbated by sharp rises in oil and natural gas prices as Brent crude oil hit $80 a barrel for the first time in almost three years on Tuesday, before falling back on Wednesday morning to $77.80.
In testimony to Congress on Tuesday, Fed chair Jay Powell acknowledged that “bottlenecks, hiring difficulties and other constraints could again prove to be greater and more enduring than anticipated, posing upside risks to inflation”.
“We are passing through stagflation, which is the worst stage of the business cycle for equities,” said Trevor Greetham, head of multi-asset at Royal London.
“You’ve got a slowdown after reopening reached fruition,” he said, “as well as high and rising inflation, stock markets are worried where companies’ earnings are going next and central banks are worrying about where interest rates have to go next.”
Economists expect the US economy to grow by an annualised 4.7 per cent in the third quarter of this year, down from the previous three-month period. Headline consumer price inflation in the US has exceeded 5 per cent for three consecutive months.
Japan and South Korea led falls in Asian markets on Wednesday, with Tokyo’s Nikkei 225 dropping 1.2 per cent while the Kospi lost 1.3 per cent. Hong Kong’s Hang Seng index was flat and China’s CSI 300 fell 0.5 per cent.
The yield on the US 10-year Treasury note, a benchmark for global borrowing costs, ticked 0.02 percentage points lower on Wednesday morning to 1.52 per cent. It is still trading at levels not seen since June and has climbed from about 1.3 per cent last week.
In currencies, the yen briefly touched its lowest level since March 2020 against the dollar, reaching ¥111.68 ahead of the selection of Japan’s new prime minister by members of the ruling Liberal Democratic party on Wednesday. The Japanese currency was steady at ¥111.44 as the LDP appointed continuity candidate Fumio Kishida.
Sterling was flat against the dollar at $1.3545, near its lowest level in eight months on Tuesday as traders feared stagflation in the UK.
Futures markets signalled that Wall Street’s blue-chip S&P 500 share index would gain 0.6 per cent in early New York dealings after losing 2 per cent on Tuesday.
“Even if you’re not that bullish long term, it usually pays to buy the dips in times of panic,” Greetham said. “But we could still be in for a period of several weeks of increased volatility.”