Wall Street stocks partially recovered from steep falls in the previous session, when fears of prolonged inflation and prospective central bank rate increases delivered the worst day for US equity markets since May.
The blue-chip S&P 500 share index gained 0.6 per cent in early New York dealings after losing 2 per cent on Tuesday. The technology-focused Nasdaq Composite rose 0.7 per cent after dropping 2.8 per cent the day before.
The yield on the US 10-year Treasury note, which moves inversely to its price, ticked 0.03 percentage points lower on Wednesday to 1.506 per cent. This key debt yield, which influences borrowing costs worldwide and tracks expectations of interest rates and inflation, has climbed from about 1.3 per cent within the past week.
The Stoxx Europe 600 index advanced 0.6 per cent after losing 2.2 per cent on Tuesday, though analysts warned stock markets were likely to remain choppy.
“Even if you’re not that bullish long-term, it usually pays to buy the dips in times of panic,” said Trevor Greetham, head of multi-asset at Royal London. “But we could still be in for a period of several weeks of increased volatility.”
Last week, policymakers at the US Federal Reserve and Bank of England indicated that their first post-pandemic rate rises could come sooner than markets had expected.
These concerns were exacerbated by sharp rises in oil and natural gas prices. Brent crude oil hit $80 a barrel for the first time in almost three years on Tuesday, before falling back on Wednesday to $78.46.
The Bank of England has warned inflation may top 4 per cent into next year, sparking expectations of a UK rate rise that pushed the yield on the 10-year gilt past 1 per cent on Tuesday for the first time since March 2020.
On Wednesday, sterling dropped as much as 0.7 per cent against the dollar to $1.344, marking its lowest point of the year so far after a UK fuel crisis compounded fears of an economic slowdown.
Sterling’s “disconnection to rates pricing” was generating concerns that the pound “becomes truly unpredictable” said Nomura currency strategist Jordan Rochester.
“We are passing through stagflation, which is the worst stage of the business cycle for equities,” said Royal London’s Greetham.
“Stock markets are worried where companies’ earnings are going next and central banks are worrying about where interest rates have to go next.”
Economists expect the US economy to grow by an annualised 4.7 per cent in the third quarter of this year, down from the previous three-month period. Headline US inflation has exceeded 5 per cent for three consecutive months.
Central banks responded to the spread of coronavirus in March 2020 by cutting interest rates to record low levels and ramping up government bond purchases, pushing yields lower and boosting the FTSE All-World index of global shares to a record high in early September.
But on Tuesday, Fed chair Jay Powell told Congress that inflationary pressures in the…
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