US stocks reversed gains from earlier in the week, falling on Thursday for the second straight session as traders scrutinised economic indicators that suggest monetary policy will continue to tighten.
The S&P 500 index of blue-chip US stocks closed down 0.8 per cent, while the Nasdaq Composite gave up 0.6 per cent. The declines came as futures markets that track the US federal funds rate indicated the borrowing benchmark would reach 5 per cent by May 2023, up from 4.6 per cent before inflation data was released last week.
US shares had gained earlier in day, with IBM rising 4.7 per cent after the tech group late on Wednesday posted better than expected third-quarter earnings and forecast full-year revenue growth above its previous guidance.
Tesla stock fell 6.7 per cent after its revenues fell short of expectations for the most recent quarter.
Investors have been watching the latest corporate earnings season for signs of strain from high inflation and rising borrowing costs. The Federal Reserve has raised interest rates by an extra-large 0.75 percentage points at each of its past three meetings in an effort to curb rapid price growth.
“When you look at earnings overall, this looks like a peak in the cycle, especially in tech and industrials,” said Karl Schamotta, chief market strategist at Corpay. He added that a strong US dollar has “steamrolled” multinationals that deal in currencies that have weakened against the greenback.
US labour market data on Thursday showed initial unemployment claims had unexpectedly fallen in the week ending October 15, dropping from 226,000 to 214,000. Economists polled by Reuters had expected a figure of 230,000. Signs of a still-hot jobs market have fuelled expectations that the Fed will continue to tighten monetary policy aggressively.
“The labour market is very robust, which gives the Fed the green light to continue raising [rates],” said Ben Jeffery, US rates strategist at BMO Capital Markets. “The consensus is that the Fed is now going to be more hawkish than expected.”
In the UK, government bonds largely shrugged off the resignation of British prime minister Liz Truss on Thursday, as investors said her departure is likely to cement a shift to more fiscally responsible policies but remained wary of a period of political instability that is likely to follow.
Gilts had rallied in the run-up to Truss’s announcement, but were little-changed by the confirmation that she is quitting after just 44 days in office.
The yield on the benchmark 10-year gilt was 0.07 percentage points higher at 3.94 per cent by the evening in London. The 30-year yield slipped 0.01 percentage point to 3.98 per cent, reflecting a small rise in price.
Sterling held on to its gains against the dollar to trade 0.08 per cent higher on the day at $1.122.
“This isn’t really a game changer for the market,” said Lyn Graham-Taylor, a rates strategist at Rabobank. “The big thing for gilts was the fiscal U-turn, but that’s already in the price, and the market probably assumes that [former chancellor Rishi] Sunak comes in and isn’t going to change things on that front.
“But then there are still plenty of questions about the internal politics of the Tory party and whether we end up with a general election. So I don’t think you’re likely to see the discount disappear from gilts.”
Truss’s contentious package of tax cuts last month had sent gilt markets into a tailspin and driven the pound to an all-time low against the dollar, sparking a liquidity crisis at pension funds and prompting emergency market intervention by the Bank of England. But new chancellor Jeremy Hunt earlier this week reassured markets by ditching the majority of the tax cuts announced last month by his predecessor Kwasi Kwarteng.
The recent strengthening in sterling showed that investors had anticipated Truss’s resignation in advance, according to Vasileios Gkionakis, a currency strategist at Citigroup.
But he remained negative on the prospects for sterling, given the continued political uncertainty and the likelihood that the Fed will continue to raise interest rates, which strengthens the dollar.
“We should not forget that the UK is still facing significant structural weakness: a high inflation rate relative to other economies and the housing market is on the precipice of a large correction,” Gkionakis said.
Europe’s regional Stoxx 600 share index closed 0.3 per cent higher.
Additional reporting by Philip Stafford and Harriet Clarfelt
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