US stocks whipsaw on Fed taper concerns and global growth jitters

Equities updates

Stocks in Europe slid and Wall Street wobbled, as investors sought safety in government bonds on expectations of tightening US monetary policy and slowing global growth.

Wall Street’s S&P 500 index gyrated, swinging from early morning losses to lunchtime gains. A further move lower in the early afternoon was again quickly erased, with the index ending the day 0.1 per cent higher. The Nasdaq Composite also whipsawed in afternoon trading and was 0.1 per cent higher on the day.

The moves in US hours followed big European bourses that had also come under pressure, with London’s FTSE 100 and the broad Europe Stoxx 600 notching their worst performances in a month, both closing 1.5 per cent lower for the day. Frankfurt’s Dax fell 1.3 per cent, and the Cac 40 in Paris declined 2.4 per cent.

Traders shifted out of oil and metals markets, leaving prices with significant declines for the day, favouring havens such as the US dollar and government bond.

Brent crude, the global oil marker, slipped 2 per cent to $66.87 a barrel. The dollar index, which measures the currency against six others, hit its highest level of the year, up 0.5 per cent. The benchmark 10-year US Treasury yield eased 0.02 percentage points to 1.24 per cent.

The gloomy trading session came after minutes from the Federal Reserve’s July policy meeting released on Wednesday indicated a majority of policymakers were prepared to begin easing the US central bank’s vast stimulus programmes later this year.

Line chart of Indices rebased showing European stocks fall on taper fears

The Fed’s $120bn a month in asset purchases has been a key pillar in a powerful global equities rally from the depths of the coronavirus crisis in March 2020. However, as the US labour market has rapidly improved and inflation has risen sharply, central bankers are now planning their exit from these measures.

“There was this suggestion of tapering sooner and faster among some FOMC [Federal Open Market Committee] members,” said Derek Halpenny, head of research for global markets at MUFG, a big financial services group. “I think that’s shaken up fragile sentiment. We are back to levels for the dollar we haven’t seen since late last year before vaccine breakthroughs set off the big risk rally.”

Concerns have also been building over global economic growth peaking. Data from China, one of the main engines for world economic output, have suggested the increase in industrial production and other key gauges has been decelerating in the latter summer months.

A combination of the rapid spread of coronavirus across parts of Asia, supply-chain issues and regulatory moves by China to meet long-term pollution goals have all weighed on sentiment. Outbreaks of the Delta coronavirus variant in south-east Asia coupled with microchip supply issues caused Toyota to reduce its global production for September by 40 per cent from its previous plan.

Commodity prices, which are particularly sensitive to the global growth outlook and US dollar strength, extended a recent decline on Thursday.

Iron ore was at $130 a tonne on Wednesday, according to a price assessment from S&P Global Platts, down almost 20 per cent over the past week. The steelmaking commodity was trading $100 a tonne higher as recently as May before concerns about slowing growth in China mounted. Beijing has also been trying to reign in steel production to meet emissions targets. China is the world’s largest consumer of iron ore.

Copper, the world’s most important industrial metal, fell 2 per cent to a five-month low below $9,000 a tonne.

Investors have begun adopting a more defensive posture in recent weeks, according to data tracking flows to exchange traded funds. Global share markets have posted sizeable gains this year, with the broad MSCI All-World barometer up about 12 per cent.

However, some fund managers have become worried over how much further markets will rise, particularly after a blockbuster corporate earnings season set a high bar for the remainder of 2021.

“Investors worry that the best of the recovery and liquidity trade is behind us, and are turning more cautious on their allocation,” said Emmanuel Cau, head of European equity strategy at Barclays. “We advise volatility hedges and a barbell allocation, but expect solid earnings fundamentals and still ample liquidity to prevail and push investors to buy the dip once again.”

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