US and European stocks were subdued on Thursday, following sharp rallies in the previous session, as traders weighed developments in Ukraine and central banks’ moves to tighten monetary policy.
Wall Street’s broad-based S&P 500 share gauge, which closed more than 2 per cent higher on Wednesday, moved between small gains and losses in early trades. The technology-heavy Nasdaq Composite added 0.2 per cent.
In Europe, the regional Stoxx 600 index steadied after rising 3.1 per cent in the previous session.
Those moves came after the Bank of England raised borrowing costs on Thursday, following on from a rate rise by the US Federal Reserve a day earlier.
The BoE’s monetary policy committee voted eight to one to raise interest rates by 0.25 percentage points to 0.75 per cent, and predicted that inflation was expected to hit 8 per cent by the end of June.
Following the decision, the yield on the UK’s 10-year gilt dropped 0.05 percentage points to 1.58 per cent, while the shorter-dated two-year gilt yield lost 0.09 percentage points. Bond yields move inversely to their prices.
Charles Hall, head of research at investment bank Peel Hunt, said the BoE’s inflation forecast looked optimistic, given that food and energy prices could rise higher if the war in Ukraine drags on for months. “A lot of this inflation is supply-driven but the bank had to be seen to be doing something. [The interest rate rise] is quite middle of the road, there were no fireworks today,” he said.
Noting that four MPC members in February had voted to raise rates by 0.5 percentage points, analysts at ING said the central bank’s “more dovish split” this time round “seems to be motivated by the war in Ukraine, which is likely to accentuate both the near-term inflation peak . . . but also its subsequent drop”.
The pound fell following the BoE’s announcement, weakening 0.4 per cent against the dollar to trade at just under $1.31.
The US Fed on Wednesday raised its main interest rate for the first time since 2018 by a quarter percentage point, in line with market expectations, in a step designed to tackle rising inflation that is expected to be stoked further by Russia’s invasion of Ukraine.
The Fed’s initial rate rise was “a little tepid” and unlikely on its own to do much to bring down inflation, said Joost Van Leenders, senior portfolio manager at Kempen Capital Management.
“The most important signal” was the central bank indicating that rates would climb at each of its next six policy meetings this year, he said, “which shows they are serious about addressing the inflation issue”.
The yield on the 10-year US Treasury note fell 0.02 percentage points to 2.17 per cent on Thursday after briefly touching a near three-year high the previous day.
In Asia-Pacific, Chinese stocks rallied sharply for a second day, after Beijing pledged it would take measures to support the economy. Hong Kong’s Hang Seng index jumped 7 per cent, while the CSI 300 index of Shanghai- and Shenzhen-listed stocks rose by almost 2 per cent.
China’s Financial Stability and Development Committee had promised “substantial measures” on Wednesday to shore up growth and flagged other supportive actions. Concerns over the country’s growth outlook had sparked double-digit falls earlier in the week.
“Policymakers will likely walk the walk,” said Xiangrong Yu, chief China economist at Citigroup. Yu pointed to statements from a swath of top institutions, including the People’s Bank of China and the banking and insurance regulator, which all pledged to carry out the new measures.
But Yu added there were “significant growth headwinds”, including signs of weakness from China’s property market and a surge in Covid-19 cases.
In commodity markets, the price of Brent crude rose 5.7 per cent to $103.64 a barrel. The international oil benchmark had approached $140 a barrel earlier this month before falling sharply.
