European stocks slid on Tuesday after a sharp overnight sell-off on Wall Street as traders took hotter-than-expected US services data as a signal of more rate hikes by the Federal Reserve.
The regional Stoxx Europe 600 and London’s FTSE 100 fell 0.6 percent and 0.4 percent, respectively, in early trade.
Contracts that track Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both traded in a tight range ahead of the New York open after US stocks sold off heavily in the previous session.
The S&P 500 and Nasdaq Composite suffered their biggest daily declines since the day after the US midterm elections on Monday, after a report from the Institute for Supply Management showed its index, which tracks economic activity in the service sector, grew for the 30th month in November, rising to 56.5 from 54.4 in October.
The stronger-than-expected number was interpreted by investors as a sign that the Fed may need to keep the world’s most important interest rate high longer to cool the US economy. A cycle of rate hikes has lifted the federal funds rate to a target range of 3.75 percent to 4 percent from zero at the start of the year.
“The latest ISM data underscores disparities in the US economy as spending continues to shift from goods to services,” said Mark Haefele, global chief investment officer of UBS’s wealth management group, noting the slowdown in the US manufacturing sector towards November.
“While inflation is likely to have peaked, price pressures in the service sector are slow to ease,” Haefele added, noting that “good economic news” reduced the chances of a so-called Fed pivot around inflation expectations.
Fed Chair Jay Powell said in a speech last week that while inflation showed signs of slowing in October, “inflation is still way too high.” Trading in futures markets shows that investors expect US interest rates to peak at around 5 percent next spring before slowly falling towards the end of 2023.
US Treasuries rallied on Tuesday after selling off sharply following the ISM release, although parts of the Treasury market continue to signal an imminent recession. The yield on interest-sensitive two-year government bonds fell 0.02 percentage points to 4.37 percent. The yield on the benchmark 10-year bond also lost 0.02 percentage points to 3.58 percent. Yields fall when prices rise.
Short-term debt, which yields more than long-term debt, tends to point to an imminent recession, and Julian Howard, lead investment director at GAM, said the Treasury market “correctly suggested that the [US] Economy is going to be really, really hit.”
In Asia, Hong Kong’s Hang Seng index fell 0.4 percent, although the index is up more than 17 percent since its late October low. China’s CSI index of stocks listed in Shanghai and Shenzhen rose 0.5 percent as zero Covid policies were eased across the country.
In commodity markets, the price of Brent crude, the international benchmark, fell 1.2 percent to $81.61 a barrel.
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