European equities and US stock futures have partially recovered from steep falls in the previous session, when fears of prolonged inflation pushing central banks to raise interest rates delivered the worst day on Wall Street since May.
The Stoxx Europe 600 index gained 0.9 per cent after losing 2.2 per cent on Tuesday.
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. Contracts on the Nasdaq 100 rose 0.7 per cent after the tech-heavy share index dropped 2.9 per cent the day before.
“Even if you’re not that bullish long-term, it usually pays to buy the dips in times of panic,” said Trevor Greetham, head of multi-asset at Royal London. “But we could still be in for a period of several weeks of increased volatility.”
Tuesday’s market downturn came after policymakers at the US Federal Reserve and Bank of England indicated last week that their first post-pandemic interest rate rises could come sooner than markets had expected because of persistently high inflation.
These concerns were exacerbated by sharp rises in oil and natural gas prices as Brent crude oil hit $80 a barrel for the first time in nearly three years on Tuesday, before falling back on Wednesday to $78.55.
Sterling dropped 0.3 per cent against the dollar to $1.3493 — around its lowest level in eight months — as a fuel crisis in the UK compounded fears of an economic slowdown.
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 Greetham.
“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.
Central banks responded to the spread of coronavirus in March 2020 by not only cutting interest rates to record low levels but also ramping up their purchases of government bonds, pushing yields lower and boosting the FTSE All-World index of global shares to a record high in early September.
“We are now getting closer and closer to the end of very accommodative monetary policy,” said Bastian Drut, chief macro-strategist at CPR Asset Management.
With surging oil and natural gas prices and the risk of contagion from a potential collapse of debt-laden Chinese homebuilder Evergrande, he said “the outlook is less rosy than it was a few months ago”.
The yield on the US 10-year Treasury note fell 0.03 percentage points on Wednesday to 1.506 per cent. It is still trading at levels not seen since June and has climbed from about 1.3 per cent last week.
