By Herbert Lash
NEW YORK (Reuters) – Global stock markets rallied after the S&P 500 pared losses that briefly pushed it into bear market territory and the dollar strengthened on Friday amid investor unease over the Federal Reserve’s tightening policy to curb inflation fueled fears of a recession.
Stocks in Europe and Asia rallied earlier after China cut a key lending benchmark to shore up its ailing economy, initially helping to propel gains on Wall Street.
China cut its benchmark five-year lending rate, which drives mortgage prices, by 15 basis points, more than expected, as authorities try to cushion the impact of an economic slowdown.
While a late-day rally kept the S&P 500 from confirming a bear market, somber sentiment on Wall Street caused the benchmark to fall for the seventh straight week, an event that has only happened since 1928, according to S&P Dow Jones indexes happened five times.
How long the downturn in stocks lasts will depend on when inflation erupts, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
“What really stunned investors this week, including myself, is when you have the types of companies that typically do well in economic weakness,” Tuz said, referring to poor earnings results at Walmart Inc and Target Corp.
The S&P 500 closed up 0.01% after falling 2.27% at one point, or below the level that would confirm a bear market — down 20% from its record closing high on Jan. 3.
The Dow Jones Industrial Average rose 0.03% and the Nasdaq Composite, already in bear territory, fell 0.3%.
Equity valuations need to fall and the expected return on capital, the discount rate, needs to rise, said Stephen Auth, chief investment officer of equities at Federated Hermes.
“The market is starting to digest the idea that this could be a new world where the discount rate for risk assets is no longer zero,” Auth said.
“You see all these different areas of the market taking pressure at the same time, and that was just really worrying for investors,” he added.
The MSCI indicator for stocks in 47 countries closed down 0.37% but still fell for the seventh straight week, the longest losing streak since the index was launched in 1990.
Earlier in Europe, the pan-regional STOXX 600 Index was up 0.73%.
US Treasury yields fell for the third consecutive month on concerns over the outlook for growth. The benchmark 10-year bond yield fell 6.5 basis points to 2.790%.
Fed fund futures were firmer, suggesting that the US rates market has backed away from some of its more extreme rate hike estimates. The interest rate market has priced in a policy rate of 2.783% by the end of next year, compared to the current level of 0.83%. Two weeks ago it was 2.9%.
The dollar’s intraday gains weren’t enough to erase sharp losses earlier this week that plunged the greenback from a five-year high against the shared currency amid concerns that its month-long rally may be overdone.
The dollar has been supported by a flight to safety in recent months amid a flight across markets on fears of rising inflation, a tightening Fed and the war in Ukraine.
The dollar index rose 0.146%, while the euro fell 0.3% to $1.0554. The Japanese yen weakened 0.09% to 127.92 per dollar.
Euro-zone bond yields were higher after two days of sharp declines as risk sentiment improved following China’s rate cut.
The 10-year German government bond yield rose 0.1 basis points to 0.9450%, down from last week’s eight-year high of 1.189%.
Markets are pricing in a 38 basis point tightening by the European Central Bank ahead of its July meeting. This suggests that a 25 basis point hike is fully priced in and the markets see a 50/50 chance of another 25 basis point hike.
Oil prices stabilized, little changing this week, as a planned European Union ban on Russian oil offset concerns that slowing economic growth could hurt demand.
U.S. crude futures were up $1.02 to $113.23 and Brent was up 51 cents to $112.55 a barrel.
Gold edged higher and headed for its first week of gains in five weeks on continued concerns over economic growth and the dollar’s decline throughout the week.
US gold futures were up 0.1% to $1,842.10.
Bitcoin fell 3.36% to $29,272.33.
Graphic: Global Stocks Plunge $13 Trillion – https://fingfx.thomsonreuters.com/gfx/mkt/zdpxownylvx/Pasted%20image%201653043233674.png
(Reporting by Herbert Lash in New York; Reporting by Samuel Indyk in London and Andrew Galbraith in Shanghai; Editing by Kirsten Donovan and Matthew Lewis)
(Only the headline and image of this report may have been edited by Business Standard contributors; the rest of the content is auto-generated from a syndicated feed.)