Stock markets turn lower on concerns over economic outlook

A shortlived rally for beaten-down global shares fizzled on Wednesday, as investors awaited a congressional appearance by Federal Reserve chair Jay Powell and business data that may signal a global slowdown.

Europe’s Stoxx 600 share index, which had gained 1.3 per cent over the previous two sessions, lost 1.5 per cent in early London dealings. The regional gauge remains more than 17 per cent lower for the year.

A FTSE index of Asia Pacific stocks outside Japan, which also rose on Tuesday, gave up most of that gain with a 2.1 per cent drop. Tokyo’s Topix slipped 0.2 per cent lower.

Futures trading implied that Wall Street’s S&P 500 would lose 1.7 per cent, after the benchmark US share gauge rose 2.5 per cent on Tuesday in a session characterised by bargain hunting following a steep decline in the previous week.

The FTSE All-World index of developed and emerging market shares has fallen for 10 of the past 11 weeks as global central banks followed the US Fed into tightening monetary policy in a bid to stamp out red-hot global inflation.

Investors are fretting about the effects of higher prices and debt costs on consumer spending and companies’ profits, while business activity surveys have signalled a manufacturing downturn caused by high commodity prices and coronavirus-related lockdowns in China.

The S&P 500 is more than a fifth below its January all-time peak, although the grind lower has featured some rallies driven by bargain hunting or hedge funds closing out short selling positions.

Tuesday was the sixth session since early April where the Wall Street benchmark had gained more the 2 per cent, according to JPMorgan.

“Each of the five previous times we have seen the index fall the next day by an average of 2.5%,” the bank’s head of US market intelligence Andrew Tyler said.

“Client activity is muted with everyone universally bearish and a sell-all rallies mentality.”

Later on Wednesday, Powell begins a two-day testimony to Congress and may offer clues about whether the Fed plans to follow up this month’s extra large 0.75 percentage point interest rate rise with another of similar magnitude in July.

S&P Global’s purchasing managers’ surveys, which investors view as real-time indicators of economic conditions, showed that global manufacturing output contracted in May for the first time since 2020.

The next set of PMI surveys are released on Thursday, with government bonds firming in price ahead of the data as economic uncertainty created demand for the low-risk assets.

The yield on the 10-year US Treasury note, which moves inversely to its price and underpins global debt pricing, fell 0.07 percentage points to 3.23 per cent on Wednesday but remained close to its highest since 2011. Germany’s equivalent Bund yield traded 0.07 percentage points lower at just under 1.7 per cent.

Brent crude oil, which has been supported this year by sanctions against Russia for its invasion of Ukraine, dropped 5 per cent to $108.87 a barrel on Wednesday following reports Washington was preparing tax measures to lower fuel costs.

The dollar index, which measures the haven currency against six others, added 0.4 per cent to remain close to a 20-year high.

The pound dropped 0.9 per cent to just under $1.21 after data showed UK inflation rose to 9.1 per cent last month, increasing fears of a recession that may hamper the Bank of England’s ability to continue raising interest rates.

Japan’s yen, meanwhile, tumbled to a fresh 24-year low of ¥136.71 against the dollar as traders bet on the Bank of Japan maintaining ultra-low borrowing costs, in defiance of the global trend.