SHARES slid worldwide on Tuesday as supply chain woes and surging costs hurt corporate earnings and manufacturing output slowed, while Treasury yields dipped as the weakness in equities revived a safe-haven bid for US government debt.
The stock market’s two-day relief rally ended as investors worried about slowing economies. Corporate profit margins have been squeezed, with soaring inflation forcing consumers to cut discretionary spending.
US and euro zone business activity slowed in May. S&P Global attributed the decline in its US Composite PMI Output to “elevated inflationary pressures, a further deterioration in supplier delivery times and weaker demand growth.”
Surging freight and raw material prices led Abercrombie & Fitch Co to say it will face headwinds until at least year-end, a day after Snapchat parent Snap Inc said the US economy worsened faster than expected in April.
The economy likely will slump as the Federal Reserve hikes interest rates to stamp out inflation, said InspereX senior trader David Petrosinelli.
“It’s really all about a hard landing and the Fed really being boxed in the corner with only demand-side tools to help,” he said. “They really need to squash demand.”
MSCI’s gauge of stocks across the globe closed down 0.91%. The pan-European STOXX 600 index fell 1.14%.
On Wall Street, the Nasdaq Composite dropped 2.35% and the S&P 500 lost 0.81% as investors turned to defensive positions. But shares pares losses late and the Dow Jones Industrial Average managed to close up 0.15%.
Value shares rose 0.17%, while growth shares fell 1.90%.
Shares of Snap plummeted 43.1%, dragging down several social media and internet stocks. Abercrombie fell 28.6%.
In Europe, all major sectors posted broad declines, with luxury stocks and retailers taking the lead.
European Central Bank chief Christine Lagarde said she saw the ECB’s deposit rate at zero or “slightly above” by the end of September, implying an increase of at least 50 basis points from its current level as the bank fights inflation.
“It has raised jitters in global markets about the possibility at least of a more aggressive move by the ECB,” said Investec chief economist Phil Shaw.
“There were reports overnight that some hawks on the governing council thought her comments yesterday seemed to rule out a 50-basis-point hike, but her remarks today appeared to leave that on the table,” he said.
Germany’s 10-year Bund yield fell 9 basis points to 0.959% , and Treasury yields skidded to one-month lows as those on benchmark 10-year Treasury notes > slid 9.8 basis points to 2.761%.
The US dollar index hit nearly a one-month low after Lagarde comments gave the euro a boost.
The dollar index fell 0.362%, with the euro up 0.39% to $1.0731.
Lagarde’s remarks should pressure the U.S. dollar in the short-term after its recent rally to the highest level in two decades, said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.
But “the broader macro backdrop still supports the risk-off take,” Rai said. “The dollar still has more room to run over the medium term.” — May 25, 2022
