NEW YORK, May 20 (Reuters) – An earlier rally in global equities collapsed and the dollar strengthened on Friday as investors worried about the Federal Reserve’s tightening policy to contain inflation, raising fears of a delay was fueled and risk-off sentiment regained the upper hand.
Shares had previously recovered in Europe and Asia after China lowered a key credit benchmark to bolster its weakening economy, aiding early gains on Wall Street.
China cut its prime rate on five-year loans, which affect mortgage prices, by 15 basis points, a cut that was sharper than expected as authorities try to cushion the effects of an economic slowdown. read more
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US Treasury yields fell for the third straight session on concerns about the growth outlook. The yield on benchmark 10-year bonds fell by 5.6 basis points to 2.799%.
Stock valuations need to come down and the expected return on investment, the discount rate, needs to go up, said Stephen Auth, chief investment officer of equities at Federated Hermes.
“The market is beginning to understand the idea that this could be a new world where the discount rate on risky assets is no longer zero,” Auth said.
“You see all these different parts of the market coming under pressure at the same time and it’s just very disturbing for investors,” he added.
The pan-European STOXX 600 index (.STOXX) closed a preliminary 0.73%. MSCI’s index of stocks in 47 countries (.MIWD00000PUS) lost 0.45% and is on track for its seventh consecutive weekly decline, the longest loss series since the index’s introduction in 1990.
On Wall Street, the Dow Jones Industrial Average (.DJI) fell 1.09%, the S&P 500 (.SPX) lost 1.28% and the Nasdaq Composite (.IXIC) fell 1.83%.
Futures on the Fed funds were firmer, suggesting that the US interest rate market has pulled back from some of its more extreme estimates for rate hikes. The interest rate market has priced in a fed funds rate of 2.783% late next year, compared to a current level of 0.83%. Two weeks ago, the percentage was even 2.9%.
The dollar made up for some of its recent losses against the euro, but remained at the pace of its worst weekly loss against the common currency since early February, as investors questioned whether the greenback’s one-month rally was due past.
The dollar has been supported in recent months by a flight to safety amid a flight across markets amid fears of rising inflation, an aggressive Fed and the war in Ukraine.
The dollar index rose 0.136%, while the euro fell 0.29% to $1.0555. The Japanese yen rose 0.01% to 127.78 per dollar.
Euro-zone bond yields were higher after two days of sharp declines as risk sentiment improved following the rate cut in China.
Ten-year German government bond yields fell 1.2 basis points to 0.932%, well below last week’s eight-year high of 1.189%.
Markets are counting on 38 basis points of European Central Bank tightening by its July meeting. This suggests that a 25 basis point increase has been fully priced in and that the markets see a roughly 50/50 chance of an additional 25 basis point move. read more
Oil prices stabilized, on course for little change for the week, as a planned European Union ban on Russian oil allayed concerns that slowing economic growth will hurt demand.
US crude rose 0.08% to $112.30 a barrel and Brent stood at $111.64, down 0.36% on the day.
Gold fell 0.1% to $1,840.71 an ounce as the precious metal-priced dollar recovered from its two-week low. But the safe-haven metal would likely still be its first weekly gain in five books.
Bitcoin fell 4.28% to $28,994.71.
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Reporting by Herbert Lash, reporting by Samuel Indyk in London and Andrew Galbraith in Shanghai; adaptation by Hugh Lawson, Kirsten Donovan
Our Standards: The Thomson Reuters Trust Principles.
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