US stocks fall as traders consider central bank policy direction

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U.S. and European stock markets fell Monday night after a choppy day of trading as investors weighed the countervailing forces of resurgent economies and central banks’ next steps to fight inflation.

The S&P 500 ended the day down 0.4%, while the tech-heavy Nasdaq Composite fell 0.6%. Both indices fell in the last hour of trading after repeatedly swinging between gains and losses earlier in the day.

Both gauges made gains last week but remain significantly lower for the year as investors adjust their expectations of the Federal Reserve’s impending end to its pandemic-era monetary support.

“The main driver of the markets right now are interest rates,” said Samy Chaar, chief economist at Lombard Odier. “Now even the [European Central Bank] has become slightly hawkish,” he added. “Markets are lost.”

The ECB has been more cautious than its counterparts in the US and UK on withdrawing stimulus, but signaled a “hawkish” turn last week when Christine Lagarde, the bank’s chair, declined to rule out a possible rate hike later in the year.

Monday’s shift in expectations hit bonds in southern European countries that are seen as particularly vulnerable to rising rates, namely Italy, Spain and Greece, although selling pressure is easing. to be toned down later in the day after Lagarde addressed the European Parliament.

Italian and Spanish stocks also suffered, with their benchmarks falling 1% and 0.4% respectively, in contrast to a 0.7% rise in the continent-wide Stoxx 600.

Investors are grappling with a conflict between improving economic trends and the potential effects of higher interest rates on borrowing costs and corporate valuations. The tech sector, where valuations have ballooned during nearly two years of ultra-low borrowing costs and coronavirus shutdowns boosting stay-at-home businesses, has been particularly volatile.

Shares of Peloton rose 20.9% on Monday following news that Amazon and Nike were evaluating offers for the home fitness group.

The Nasdaq has fallen 10% so far in 2022, while the S&P, which is broader but still dominated by big tech stocks, is down more than 5%.

Meta’s disappointing earnings last week led the Facebook owner to the biggest one-day drop in a company’s market capitalization on record. Amazon made its best one-day gain since 2015 on Friday.

On Friday, US jobs data showed employers in the world’s largest economy added an unexpected 467,000 new jobs last month, signaling the resilience of the recovery from the shocks caused by the… coronavirus of 2020. But inflation data later in the week is expected to show consumer prices rose 7.3% in the year to January – a new high in four decades.

“A record amount of stimulus is about to be pulled out of the global economy,” said Andrew Sheets, strategist at Morgan Stanley, noting that major central banks are expected to shrink their balance sheets by $2 billion in during the 12 months from May this year. “For investors, the scale of what lies ahead means we believe they should keep global exposure light.”

Last week, markets priced in more than five quarter-point rate hikes by the Fed this year.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, slipped 0.01 percentage point to 1.92%.

Brent, the global oil benchmark, fell 0.6% to $92.69 a barrel, but remained near its highest level since 2014.

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