Net downturn in sight, Powell cast a chill

EUROPEAN STOCK EXCHANGES EXPECTED DOWN by Marc Angrand PARIS (Reuters) – The main European stock markets are expected to fall on Friday in the wake of Wall Street and Tokyo after statements by Jerome Powell, the Chairman of the Federal Reserve, which confirm the scenario of a half-point rate hike in early May and a series of further hikes thereafter. Index futures suggest a drop of 1.82% for the CAC 40 in Paris, 1.44% for the Dax in Frankfurt, 1.22% for the FTSE 100 in London and 1.71% for the EuroStoxx 50. A 50 basis point hike in the federal funds (“fed funds”) rate target will be “on the table” at the May 3-4 monetary policy meeting, Jerome Powell says Thursday after the close of European markets, before implicitly validating the scenario favored by the markets of a series of increases of half a percentage point in the coming months. After these comments, Nomura analysts announced that they were expecting increases of 75 basis points in June and then in July, which would constitute the fastest rise since 1994. “In the short term, the Fed seems focused only on the return rates at a neutral level of around 2.25%-2.50%,” they explain. At the same time, in the euro zone, the scenario of a first rate hike in July continues to strengthen according to statements by officials of the European Central Bank (ECB). The general climate is therefore unfavorable for equities, especially since the prolonged confinements in China risk fueling inflation in the weeks and months to come while weighing on activity. In this context, the first results of the monthly S&P Global PMI surveys expected in the morning in Europe will be studied with attention. On the menu of the day are also the results of several major European groups, including SAP, Renault and EssilorLuxottica. RATES The Fed’s offensive rhetoric on rates continues to fuel the rise in US government bond yields: the ten-year, at 2.9317%, is once again approaching the 3% threshold on which it had stumbled Start of the week. The five-year crossed this 3% threshold for the first time since the end of 2018 and the two-year hit a new high of more than three years at 2.762%. In Europe, the German ten-year rose more than three basis points in early trading at 0.955% and the two-year was at its highest since early 2014 at 0.21%. Money markets are now pricing in an 80 basis point rate hike from the European Central Bank (ECB) by the end of the year. IN WALL STREET The New York Stock Exchange ended sharply lower on Thursday after abandoning its initial gains, as statements by Jerome Powell brought rising interest rates back to the forefront of investors’ concerns. The Dow Jones index fell 1.05%, or 368.03 points, to 34,792.76, the Standard & Poor’s 500 lost 65.79 points (-1.48%) to 4,393.66 and the Nasdaq Composite lost fell 278.41 points (-2.07%) to 13,174.65. All three had however started in the green after a series of well-received company results, such as those of Tesla (+ 3.23%) or several airlines. Jerome Powell’s remarks pushed back the major growth stocks, such as Alphabet (-2.51%) or Amazon (-3.7%). Futures contracts on the main indices signal a further decline of around 0.2%. IN ASIA On the Tokyo Stock Exchange, the Nikkei index ended down 1.63%, a decline that particularly affected technology and growth stocks. In China, the major indices, hesitant for most of the session, started to rise again after touching their lowest level since mid-March: the Shanghai SSE Composite gained 0.66% and the CSI 300 0, 8%. EXCHANGES The dollar gave up a little ground against the other major currencies (-0.09%) after the rise of nearly 0.2% which welcomed Jerome Powell’s remarks on Thursday. The euro, for its part, rose to 1.0846 dollars (+0.09%) and is currently showing a weekly increase of around 0.3% after two consecutive weeks of decline. OIL The oil market is once again suffering from the prospect of a rise in rates as well as fears of persistent weakness in Chinese demand, and it is headed for a decline of around 4% over the week. Brent fell 1.08% to 107.16 dollars a barrel and US light crude (West Texas Intermediate, WTI) 1.16% to 102.59 dollars. (Edited by Matthieu Protard)