(Bloomberg) — US stocks fell Tuesday as inflation pressures accelerated in Europe, intensifying the debate over how quickly central banks will raise interest rates in response.
The S&P 500 fell 1%, led lower by health care and industrials, while the Nasdaq 100 and Europe’s Stoxx 600 Index also slid. Treasury yields climbed across the curve, joining the selloff in German bunds and European bonds. The dollar advanced.
Euro-zone consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. Meanwhile, WTI crude oil rose above $119 a barrel after the European Union agreed to pursue a partial ban on Russian oil.
Fears central bank rate hikes in response to stubbornly high inflation are keeping investors watchful. Global stocks are on track to end the month with modest gains amid skepticism about whether the market is near a trough and as volatility stays elevated.
“It’s very hard to have conviction at the moment,” Mike Bell, global market strategist at JPMorgan Asset Management, said in an interview with Bloomberg Television. “We think it makes sense to be neutral on stocks and pretty neutral on bonds actually.” The possibility that Russia could retaliate to the EU move on oil by disrupting gas flows “would make me be careful about being overweight risk assets at the moment,” he said.
President Joe Biden will hold a rare Oval office meeting on Tuesday with Federal Reserve Chair Jerome Powell amid the highest inflation in decades and ahead of US payroll numbers later this week. The meeting comes after Fed Governor Christopher Waller said Monday he wants to keep raising rates in half-percentage point steps until inflation is easing back toward the central bank’s goal.
“This time, the Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect,” Franklin Templeton Fixed Income Chief Investment Officer Sonal Desai said in a note. “The corresponding risk to asset prices and economic growth is greater than many like to admit.”
Among individual stock moves, Deutsche Bank AG slipped after the lender and its asset management unit had their Frankfurt offices raided by police. Unilever Plc jumped as activist investor Nelson Peltz joined its board. US energy stocks rose following the advance in crude oil prices. And US-listed Chinese stocks also climbed, on track to wipe out their monthly losses as easing in lockdown measures in major cities and better-than-expected economic data reassured investors.
“Despite a potential strong finish to a historically weak month, the SPX is still coming into June with a loss of more than 10%,” Craig W. Johnson, chief market technician at Piper Sandler, said in a note. “The good news is that for similar performance years, the index has historically rebounded into year-end. For years with losses of more than 10% from January to May, the SPX has posted average and median June to December returns of 6.3% and 5.8%, respectively.”
Elsewhere, Bitcoin was back above $31,000 as investors and strategists said the digital currency is showing signs of bottoming out.
How will markets be affected by the Fed’s quantitative tightening? QT officially starts Wednesday and is the theme of this week’s MLIV Pulse survey. Click here to participate anonymously.
Here are some key events to watch this week:
- The Federal Reserve is set to start shrinking its $8.9 trillion balance sheet Wednesday
- The Fed releases its Beige Book report on regional economic conditions Wednesday
- New York Fed President John Williams, St. Louis Fed President James Bullard speak at separate events Wednesday
- OPEC+ virtual meeting Wednesday
- Cleveland Fed President Loretta Mester discusses the economic outlook Thursday
- US May employment report Friday
- The UN’s Food and Agriculture Organization releases its monthly food price index at a time of maximum concern about global supplies on Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1% as of 9:48 a.m. New York time
- The Nasdaq 100 fell 0.8%
- The Dow Jones Industrial Average fell 1.2%
- The Stoxx Europe 600 fell 0.6%
- The MSCI World index fell 0.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.7% to $1.0702
- The British pound fell 0.6% to $1.2577
- The Japanese yen fell 0.9% to 128.78 per dollar
Bonds
- The yield on 10-year Treasuries advanced 10 basis points to 2.84%
- Germany’s 10-year yield advanced seven basis points to 1.13%
- Britain’s 10-year yield advanced eight basis points to 2.07%
Commodities
- West Texas Intermediate crude rose 3.2% to $118.76 a barrel
- Gold futures fell 0.1% to $1,854.60 an ounce
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