(Bloomberg) — European stocks declined and US equity futures pared gains as the prospect that central banks will keep interest rates high to fight inflation hurt sentiment.
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The Stoxx 600 Index fell 0.4%. In individual moves, Adevinta ASA soared after the European classifieds company said it received a takeover proposal from private equity investors including Blackstone Inc. and Permira.
A modest advance in US contracts followed heavy losses on Wall Street Thursday as traders responded to the hawkish tone from the Federal Reserve this week. Microsoft Corp. edged higher in premarket as its $69 billion acquisition of Activision Blizzard Inc. came closer to gaining approval from UK competition authorities.
The euro weakened after figures showed private-sector activity in France and Germany continued to shrink in September, with demand for goods and services missing economist estimates.
Global central banks this week stressed that they remain vigilant about the risks of inflation and warned investors against premature expectations of rate cuts. The increasing risk that monetary policy will lead to recession is prompting investors to dump stocks at the fast pace since December, strategists at Bank of America Corp. said.
Equity funds had outflows of $16.9 billion in the week through Sept. 20, according to a note from the bank citing EPFR Global data. The team led by Michael Hartnett said persistently high interest rates could lead to a hard economic landing in 2024, and result in “pops and busts” in financial markets.
“What matters more than Fed hikes themselves is whether a recession occurs or not,” said Wolf von Rotberg, an equity strategist at Bank J Safra Sarasin Ltd. “It would be a remarkable accomplishment if it were avoided, yet that seems unlikely. If a recession were to happen, the equity market is not prepared for it.”
Fresh signs of resilience in the US labor market reinforced the case for the Fed’s stance of holding interest rates higher for longer. Applications for US unemployment benefits fell to the lowest level since January last week, figures out Thursday showed.
The Bloomberg dollar index was steady. Treasury yields were broadly flat after the rate on the 10-year note reached 4.5%, the highest level since 2007, in the wake of the strong labor data.
“The prospect of interest rates staying higher for longer has given investors a lingering headache and sentiment has worsened as the week progressed,” said Russ Mould, investment director at AJ Bell. “Many investors had hoped we would approach the end of 2023 with a clearer picture on when interest rates will start to be cut. That scenario has now been muddied by comments from the Fed that it is prepared to raise rates further if necessary and keep a restrictive policy until there are clear signs that inflation is moving back to target levels.”
The yen weakened after the Bank of Japan held interest rates, its 10-year yield target and forward guidance unchanged. The central bank reiterated its expectation that inflation is decelerating.
In Asian stock trading, a region-wide equity index retraced early declines. Chinese shares rallied, a move that likely reflects “short covering on expectations of more policy support measures over the weekend, just like the government’s moves in every weekend this month,” said Steven Leung, an executive director at Uob Kay Hian Hong Kong Limited.
Oil rose, in part supported by news that Russia would ban exports of diesel-type fuel and gasoline. European natural gas prices fell as Chevron Corp. and labor unions in Australia agreed to end strikes at major export plants that roiled the market for more than a month.
Key events this week:
Some of the main moves in markets:
Stocks
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The Stoxx Europe 600 fell 0.3% as of 9:37 a.m. London time
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S&P 500 futures rose 0.1%
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Nasdaq 100 futures rose 0.3%
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Futures on the Dow Jones Industrial Average were little changed
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The MSCI Asia Pacific Index rose 0.3%
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The MSCI Emerging Markets Index rose 0.8%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro fell 0.2% to $1.0642
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The Japanese yen fell 0.5% to 148.31 per dollar
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The offshore yuan rose 0.2% to 7.3026 per dollar
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The British pound fell 0.4% to $1.2246
Cryptocurrencies
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Bitcoin rose 0.4% to $26,699
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Ether rose 0.6% to $1,597.92
Bonds
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The yield on 10-year Treasuries declined two basis points to 4.47%
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Germany’s 10-year yield declined one basis point to 2.72%
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Britain’s 10-year yield declined four basis points to 4.27%
Commodities
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Brent crude rose 0.2% to $93.48 a barrel
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Spot gold rose 0.3% to $1,926.69 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Richard Henderson and Sagarika Jaisinghani.
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