US and European equities rally wavers

Published On: March 31, 2022Categories: Stocks & Shares1.7 min read

Dow Jones Industrial Average ended down 0.19%, the S&P 500 fell 0.63%, the Nasdaq Composite shed 1.2%, Euro STOXX 600 lost 0.4%, while the MSCI world equity index eased 0.32%

The US and European equities rally wavered on Wednesday as investors reviewed economic and geopolitical risks, while oil prices jumped more than $2 on the prospect of more Russian sanctions.

The breather in stocks followed three to four straight days of gains that more than erased losses sustained when Russia invaded Ukraine five weeks ago, and came as bond investors wondered whether the US Federal Reserve’s policy tightening could harm the world’s biggest economy over the longer term.

A key part of the US yield curve briefly inverted on Tuesday in what is widely viewed as a harbinger of a recession, although it has since reverted.

We see further equity upside medium-term given a robust growth picture, low bar for first-quarter earnings, and narrowing credit spreads, analysts at JP Morgan’s Global Markets Strategy said.

We see too much negativity around the Fed since the start of Fed tightening cycles proved positive for equities historically, and policy is easing in Japan and China, they said.

The Dow Jones Industrial Average ended down 0.19%, the S&P 500 fell 0.63%, and the Nasdaq Composite shed 1.2%.

Europe’s broad Euro STOXX 600 lost 0.4%, while the MSCI world equity index, which tracks shares in 50 countries, eased 0.32%.

The widely tracked yield curve showing the difference between two- and 10-year US Treasury yields bounced back to 4 basis points on Wednesday. It had briefly inverted to minus 0.03 of a basis point on Tuesday for the first time since September 2019.

Longer-dated yields falling below shorter ones indicate a lack of faith in future growth. A drop in 10-year yields below 2-year rates signals a recession.

Sebastien Galy, a senior macro strategist at Nordea Asset Management, said fixed income and equity markets are diverging in their outlooks and the split bears watching.

Galy said: Equity markets are overly optimistic and the fixed income markets are probably being overly pessimistic.

An inverted Treasury curve has in recent decades been followed by a recession within two years, including the 2020 downturn caused by the Covid-19 pandemic.

Benchmark indexes in Frankfurt and Paris lost 1.5% and 0.74% respectively, while London shares bucked the trend and jumped 0.55%.

About the Author: Jonathan Adams

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