Wall Street stocks rapidly reversed direction on Friday as US policymakers paused negotiations over the debt-ceiling deal and nerves over the health of the US regional banking sector returned.
Investors bought US Treasury bonds and lowered their expectations that the Federal Reserve would raise interest rates in June after chair Jay Powell warned tighter credit conditions — the result of the turmoil at US banks — may mean the Fed will not have to raise interest rates as high to reach their 2 per cent inflation target.
Meanwhile, Republican lawmakers walked out of negotiations to avert a US default. The halt put the risk of an unprecedented national default back on the table.
Early gains on Wall Street evaporated. The benchmark S&P 500 lost 0.2 per cent and the tech-heavy Nasdaq Composite was down 0.3 per cent.
Following Powell’s comments, pricing in the futures market showed investors were only betting on a 22 per cent chance the Fed would raise interest rates again at its meeting in June. Earlier Friday, those expectations had been about 40 per cent.
The yield on interest rate-sensitive two-year Treasury notes was down 0.07 percentage points at 4.26 per cent. The yield on the benchmark 10-year note gained 0.02 percentage points to 3.66 per cent. Bond yields rise when prices fall.
At the same time US region banks stumbled after CNN reported Janet Yellen, US Treasury secretary, told bank chief executives this week that more mergers may be necessary. The KBW Regional Banking index fell 3 per cent on Friday.
Germany’s Dax rose 0.7 per cent to close at a record high of 16,275 although it gave up further advances as markets turned. Europe’s region-wide Stoxx 600 rose 0.8 per cent while France’s CAC 40 added 0.6 per cent, extending gains from the previous session.
“In Europe, and as a result Germany, earnings have done much better than implied by macroeconomic indicators,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
Germany’s producer price index for April showed the annual rate of inflation had fallen to 4.1 per cent compared with 6.7 per cent in March. The reading was 0.1 percentage points higher than the forecast of economists polled by Reuters.
The index in Frankfurt has gained 17 per cent since the start of the year, lifted in part by strong earnings in the industrials sector.
“There were supply constraints, so [Germany] couldn’t produce cars to match demand . . . the semiconductor shortages have really gone away now, so they have been able to increase production,” said Chris Hiorns, a fund manager at EdenTree.
The dollar index, which tracks the US currency against a basket of six peers, fell 0.4 per cent.
Asian stocks fell, as pessimism over the tech sector stopped the US rally from spreading to the region.
Hong Kong’s Hang Seng index retreated 1.4 per cent, while China’s benchmark CSI 300 stock dropped 0.3 per cent after weak third-quarter results from tech giant Alibaba damped investor sentiment.
China’s onshore currency fell 0.1 per cent to 7.027 against the US dollar, its lowest level since December after China’s April data showed weak consumer spending and industrial production, as well as record-high youth unemployment. The numbers pointed to a faltering economic recovery following the unwinding of its zero-Covid curbs last year.
