US and European stock markets struggled for direction on Monday, as investors weighed countervailing forces of resurgent economies and central banks’ next steps to fight inflation.
The S&P 500 and tech-heavy Nasdaq Composite were both close to flat in mid-afternoon trading in New York, but struggled to settle and swung repeatedly between gains and losses.
The two gauges made gains last week but remain significantly lower for the year, with investors adjusting expectations for the Federal Reserve’s impending end of its pandemic-era monetary support.
“The main driver of markets at the moment is interest rates,” said Samy Chaar, chief economist at Lombard Odier. “Now, even the [European Central Bank] has turned slightly hawkish,” he added. “Markets are lost.”
The ECB has been more cautious than its peers in the USA and UK in moving towards withdrawing stimulus, but signalled a “hawkish” shift last week when Christine Lagarde, the bank’s president, refused to rule out a potential rate rise later in the year.
The shift in expectations on Monday hit bonds of southern European countries that are seen as particularly vulnerable to rising rates, namely Italy, Spain and Greece, though the selling pressure eased later in the day after Lagarde addressed the European Parliament.
Italian and Spanish stocks also suffered, with their benchmark indices dropping 1 per cent and 0.4 per cent respectively, in contrast to a 0.7 per cent increase in the continent-wide Stoxx 600.
Investors are grappling with a conflict between improving economic trends and the potential effects of higher interest rates on borrowing costs and company valuations. The technology sector, where valuations swelled during almost two years of ultra-low borrowing costs and coronavirus lockdowns boosting stay-at-home businesses, has been especially volatile.
Shares in Peloton rose more than 15 per cent on Monday, following news that Amazon and Nike were evaluating bids for the at-home fitness group.
The Nasdaq has dropped 10 per cent so far in 2022, while the S&P, which is broader based but still dominated by big tech shares, is down more than 5 per cent.
Disappointing earnings from Meta last week drove the Facebook owner to the largest single-day drop in a company’s market capitalisation on record. Amazon on Friday achieved its best one-day gain since 2015.
US jobs data on Friday showed employers in the world’s largest economy added an unexpectedly high 467,000 new roles last month, signalling the resilience of the recovery from the coronavirus-driven shocks of 2020. But inflation data later in the week are expected to show consumer prices rose 7.3 per cent in the year to January — a fresh four-decade high.
“A record amount of stimulus is about to be withdrawn from the global economy,” said Andrew Sheets, strategist at Morgan Stanley, noting that important central banks were expected to shrink their balance sheets by $2tn in the 12 months from May this year. “For investors, the scale of what lies ahead means we think they should keep overall exposure light.”
Markets last week priced in more than five quarter-point rate rises by the Fed this year.
The yield on the benchmark 10-year Treasury note, which moves inversely to its price, slipped 0.01 percentage points to 1.92 per cent.
Brent crude, the global oil benchmark, fell 0.6 per cent to $92.79 a barrel, but remained close to its highest level since 2014.
US stocks flat as traders consider central bank policy direction
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