European equities recovered some losses after a bruising previous session for global stocks, as investors awaited the minutes of the Federal Reserve’s latest monetary policy meeting amid signs of an economic slowdown.
The Stoxx 600 share index added 0.8 per cent in early dealings. London’s FTSE 100 rose 0.5 per cent and futures trading implied Wall Street’s S&P 500 would add 0.5 per cent at the New York open.
Those moves came after the Stoxx dropped more than 1 per cent on Tuesday and Wall Street’s tech-heavy Nasdaq Composite lost 2.3 per cent, as investors dumped stocks in response to social media group Snap warning on macroeconomic conditions.
Data released on Tuesday also showed US new home sales fell almost 17 per cent in April month on month. Purchasing managers’ surveys also indicated that growth in business activity in the US and UK slowed during May.
The Fed, which influences monetary policy worldwide and releases minutes of its latest rate-setting meeting later on Wednesday, has pledged to raise borrowing costs until it has tamed inflation, which is running at four-decade highs. However, some analysts are now questioning how far the Fed can raise interest rates before it runs the risk of tilting the world’s biggest economy into recession.
“A slowing economy doesn’t mean that the Fed should shift from being hawkish to dovish, but it does raise the question of how much a given level of rates causes activity to slow,” Standard Chartered strategist Steve Englander said.
“If the economy is already below potential and is responding to rates of three to six months ago, the slowdown has further to go. The path of rate hikes could be flattened while still putting downward pressure on demand.”
Analysts said stocks were also finding support from rebalancing by funds that needed to buy equities, following strong falls in recent months, to maintain asset allocation mandates. The FTSE All World index of developed and emerging market shares has dropped 4.1 per cent during May so far, following an 8 per cent loss in April.
“Long-term investors like pension funds, which have allocation threshold limits to stick to, usually end up rebalancing their portfolios as we approach quarter-end,” strategists at Barclays said in a note to clients.
“This is likely to drive flows out of fixed income and into equities to some extent over the coming weeks.”
US Treasury bonds, which rallied on Tuesday as traders bet on the Fed pursuing less aggressive monetary policy, were steady in European morning trading.
The yield on the 10-year Treasury note was flat at 2.76 per cent, around a one-month low. The two-year yield, which closely tracks interest rate expectations, traded at 2.52 per cent, also around a month low.
The euro lost 0.5 per cent against the dollar to just under $1.07, as a bounce fuelled by European Central Bank president Christine Lagarde signalling the end of negative interest rates in the eurozone faded out.
Elsewhere, the New Zealand dollar rose 0.67 per cent against its US counterpart to $0.65 after the nation’s central bank raised its key interest rate by half a percentage point to 2 per cent and said “it remains appropriate to continue to tighten monetary conditions at pace” to combat inflation.
Brent crude, the oil benchmark, rose 0.8 per cent to $114.38 a barrel.
