European equities perk up after tumultuous trading day

European equities rose on Tuesday, after a wild ride on Wall Street, as prospects of the US central bank reversing its pandemic-era monetary stimulus caused swings across global markets.

The Stoxx Europe 600 index gained 1 per cent in early dealings, rebounding from a 3.8 per cent drop in the previous session. This followed a day of intense shifts on Wall Street, where the benchmark S&P 500 index briefly fell into correction territory before reversing its losses as traders took advantage of sharp drops to buy discounted shares.

Bargain hunters stayed on the sidelines in Asia-Pacific. Hong Kong’s Hang Seng share index fell 2 per cent as Chinese tech companies declined. Wall Street stock futures implied renewed selling later in the day, with contracts on the tech-heavy Nasdaq 100 down 1.3 per cent while those on the S&P 500 dropped 0.8 per cent.

The FTSE All World index of developed and emerging market shares has lost more than 6 per cent this month — leaving it on track to record the worst month since 2020 — as investors grapple with a hawkish tilt by the US Federal Reserve, which is expected to raise interest rates about four times this year to battle surging inflation.

The change of stance comes after the world’s most influential central bank tethered borrowing costs near zero and bought vast quantities of Treasuries and other debt instruments to ease financial conditions through the pandemic, boosting stock markets and investors’ appetite for speculative assets.

Valuations have fallen across Wall Street, with the forward price-to-earnings ratio on the S&P 500 having dropped from 23 in June to around 19, as investors project higher interest rates that cut the present value of companies’ future cash flows.

Shares in technology groups, which make up large parts of the two main US indices and often are not expected to produce peak profits for years into the future, have been especially volatile.

“You naturally see the most multiple compression in the companies that are short of near-term profit and where those cash flows are many years out,” said Grace Peters, head of investment strategy for Europe at JPMorgan’s private bank.

The Nasdaq fell as much as 4.9 per cent on Monday, approaching a bear market defined by a 20 per cent drop from its all-time high, before rebounding later in the session. The Vix, the measure of expected volatility on the S&P 500 that has a long-run average of around 20 points, hit 38.4 on Monday and remained above 32 on Tuesday.

Some analysts suspect the Fed may end its two-day meeting by soothing fears of rapid rate rises affecting economic growth.

“The market has got a bit ahead of itself,” said Jorge Garayo, global head of inflation strategy at Société Générale. “This meeting will be about pushing back against even more hikes being priced,”

US Treasury prices softened on Tuesday, after firming in recent days as traders sheltered from stock market volatility. The yield on the benchmark 10-year Treasury, which moves inversely to its price and sets the tone for debt pricing worldwide, added 0.06 percentage points to 1.79 per cent.

Germany’s equivalent Bund yield was flat at just under zero. The dollar index, which measures the US currency against six others, was steady.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

Leave a Comment