European stocks and Wall Street futures declined on Friday as traders assessed how the end of pandemic-era monetary stimulus might pressure equity markets.
The regional Stoxx 600 Europe index fell 1 per cent by early afternoon in London while the UK’s FTSE 100 was down 0.4 per cent.
Futures markets implied the blue-chip S&P 500 share index would lose 0.7 per cent in early New York dealings, following a 1.4 per cent fall on Thursday. Contracts tracking the top 100 stocks on Wall Street’s Nasdaq Composite dropped 1 per cent after the tech-heavy index fell 2.5 per cent during Thursday’s session.
Inflation figures on Wednesday revealed that US consumer prices rose by an annual 7 per cent in December, their fastest pace in almost four decades. A day later, separate data showed that US wholesale prices rose at 9.7 per cent in December, the most since this measure of what businesses pay suppliers was first calculated in 2010.
Officials at the US Federal Reserve, whose main funds rate affects borrowing costs and stock market valuations worldwide, have also signalled their support for the first interest rate rise of the pandemic era in March.
“If inflation heads higher then the fear factor really does come in,” said Aneeka Gupta, research director at ETF provider WisdomTree.
The Stoxx technology sub-index was one of the worst performers in Europe on Friday, dropping 1.7 per cent.
Ultra-low interest rates can boost tech and other high-growth stocks by lowering the discount rate professional investors use to value equities, which in turn makes cash flows expected far into the future more valuable.
“When interest rates are very low, tech valuations get bloated,” said Gupta. “As interest rate expectations start to rise, these valuations come off”.
Swaps markets have priced in a gradual pace of increases, with the funds rate ending the year at 1 per cent or below. But equity investors who enjoyed double-digit gains in the past two years are querying whether such projections are too optimistic.
“The markets are in this period of transition which of course always goes with some doubts,” said Geraldine Sundstrom, a managing director and portfolio manager at Pimco.
“We are moving from a time where inflation was deemed transitory and central banks would remain accommodative as far as the eye could see to a time when it is natural to expect some removal of monetary accommodation, but how much that should be is the big question mark for everyone,” she added.
US bank shares broadly fell in pre-market trading after JPMorgan Chase reported a fall in quarterly revenues at its trading business.
In government debt markets, the yield on the US 10-year Treasury note, which moves inversely to its price, added 0.03 percentage points to 1.73 per cent. The two-year Treasury yield, which closely tracks interest rate expectations, rose 0.02 percentage points to 0.92 per cent.
The dollar index, which measures the greenback against six other currencies, traded flat.
In an indication that Russian geopolitical tensions were beginning to seep into financial markets, Moscow’s benchmark Moex stock index was down 1.7 per cent, taking its weekly decline to more than 4 per cent.
Brent crude, the oil benchmark, added 0.5 per cent to $84.93 a barrel.