Oil prices slipped to their lowest level since February, and government bond yields fell, as a pessimistic forecast from the Bank of England added to concerns about the global economic outlook.
Brent crude, the international oil benchmark, fell 2.8 per cent to $94.12 a barrel, bringing its declines for the week to more than 12 per cent.
The BoE on Thursday became the latest central bank to announce a bumper interest rate rise, lifting rates by 0.5 percentage points for the first time in 27 years.
Despite the rate rise, yields on UK government gilts tumbled in the immediate aftermath of the announcement as investors bet that the worst squeeze in living standards in more than 60 years would force the central bank to limit further rate increases. Yields fall when prices rise.
The yield on the benchmark 10-year gilt fell as much as 0.1 percentage points before retracing much of the move to trade at 1.89 per cent, down 0.02 percentage points for the day, according to Bloomberg data.
“The price action we are seeing at the moment in response to the largest hike in 27 years is not what you would usually expect,” said Karim Chedid, head of investment strategy for Europe at BlackRock’s iShares unit.
“It is a dovish reaction,” Chedid continued, because “the market views the BoE as unable to continue with the same level of [monetary] tightening against this economic backdrop.”
US and eurozone governments bonds also rose in price on Thursday, taking a cue from the BoE that other central banks may be forced to soften their stance against inflation to balance supporting economic growth.
Like gilts, the 10-year US Treasury yield slipped in early trade before pulling back to 2.66 per cent, a 0.04 percentage points decline for the day. Germany’s 10-year Bund yield shed 0.07 percentage points, to 0.80 per cent.
Federal Reserve officials have this week moved to dismiss market speculation that the US central bank would start cutting rates early next year in response to an economic slowdown.
St Louis Fed president James Bullard told CNBC on Wednesday that US interest rates would “probably have to be higher for longer” to reduce inflation from 40-year highs.
“Investors have been assuming that central banks will not go as far as they said they will,” said Eric Knutzen, chief investment officer for multi-asset at Neuberger Berman. “We think that’s too optimistic.”
Equity markets wavered amid the uncertain outlook and thin summer trading. The S&P 500 closed 0.1 per cent lower, while the Nasdaq Composite gained 0.4 per cent per cent.
The Nasdaq has added 15 per cent since June 30, buoyed by strong tech sector earnings as well as predictions of lower interest rates that boost the valuations of higher growth companies. The rebound followed the worst first half of the year for US stocks in half a century.
“This is a bear market rally,” said Willem Sels, global chief investment officer at HSBC’s private bank, with markets “incorporating a view that inflation will quickly come down and there will be a big pivot by central banks”.
Sterling also slipped sharply after the BoE announcement before recovering much of its losses. The currency gained 0.2 per cent against the dollar by late afternoon in New York, to $1.217, but remained 0.6 per cent lower against the euro at €1.188.