Equities dropped across Europe and Asia-Pacific on Thursday as a US inflation scare that rattled Wall Street in the previous session rippled through global stock markets.
Europe’s Stoxx 600 index dropped by 1.7 per cent by mid-morning in London. The UK’s FTSE 100 fell by 2.4 per cent.
Japan’s Topix closed 1.5 per cent lower, taking its losses for the week to 4.4 per cent. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks both dropped 1.2 per cent. All of Asia’s other main bourses were also in the red.
Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a more rapid pace than economists had forecast. The report sent the S&P 500 2.2 per cent lower, the Wall Street benchmark’s worst one-day performance since February.
Prospects of sustained higher inflation can depress stock and bond prices by lowering the real returns from dividends or fixed-interest payments. Wednesday’s data also increased speculation that the US Federal Reserve, the world’s most powerful central bank, could accelerate its timeline for reducing its $120bn of bond purchases that have supported financial markets since last March.
Fed vice-chair Richard Clarida said on Wednesday, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target.
“People are running scared because of inflation and they are worried about higher interest rates,” said Patrick Spencer, vice-chair of equities at Baird.
He added that with “so much liquidity in the stock markets” after the Fed and other global central banks unleashed trillions of dollars into the financial system in response to the pandemic, equities were poised for a “healthy short-term correction”.
The FTSE All World index of large and mid-cap stocks in developed and emerging markets hit an all-time high on May 7 before losing more than 4 per cent of its value so far this week.
Since global drugmakers announced effective coronavirus vaccines last November, shares in banks, industrial groups and other sectors whose fortunes are pegged to economic growth have outperformed the tech stocks that benefited from the pandemic.
But on Thursday, investors pulled money out of these so-called reopening trades as well as the tech sector. The technology sub-index of the Stoxx dropped by 1.6 per cent on Thursday, while its banks and travel shares fell by 2.4 per cent and travel groups lost 2 per cent.
Reopening trades had “become frothy” and had “priced in so much of the recovery” even though big global economies have not fully reopened yet, said Sonja Laud, chief investment officer of Legal & General Investment Management.
The yield on US 10-year Treasuries, which moves inversely to its price, fell by 0.03 percentage points to 1.674 per cent on Thursday. This yield has risen from about 0.9 per cent at the start of the year but remains below its high point of the year, reached in March.
That bond markets had not reacted as violently to Wednesday’s US inflation report as equities had, Laud said, was evidence that stock market investors had been looking for an excuse to bank some gains. “It was time to take a breather,” she said.
Elsewhere in markets, the index that measures the dollar against a basket of major currencies was flat. The euro was steady against the dollar at $1.1208. Sterling was also flat, purchasing $1.1404.
International oil benchmark Brent crude dropped 2.3 per cent to $67.71 per barrel. The Colonial pipeline in the US, which transports fuel across the country, resumed operations on Wednesday after being shut down last Friday by a cyber attack.