European equities edged lower and Wall Street stock futures rose at the end of a wild week for global markets as investors balanced the prospects of a rapid round of interest rate rises by the US Federal Reserve with an upbeat quarterly update from Apple.
The regional Stoxx 600 share index lost 0.4 per cent in early dealings, following a volatile session on Wall Street in which the main US indices initially rallied before closing lower. Futures markets suggested the S&P 500 index would edge higher when trading opens in New York, while contracts tracking the technology-focused Nasdaq 100 added 0.6 per cent.
Equity markets, particularly those on Wall Street, have swung this week as investors grappled with a hawkish message from Federal Reserve chair Jay Powell at the end of the US central bank’s monetary policy meeting on Wednesday.
But the mood on Wall Street was boosted overnight by record quarterly revenues and better than expected profits from Apple. The iPhone maker also revealed a lighter hit than analysts had forecast from coronavirus-related semiconductor supply chain glitches, which have contributed to soaring inflation in the US and Europe. Apple’s shares jumped 5 per cent in pre-market trading.
Chinese markets turned lower, with Hong Kong’s Hang Seng index falling 1 per cent. Tokyo’s Nikkei 225 closed 2.1 per cent higher as Japan’s exporters were boosted by a stronger dollar and weaker yen. South Korea’s technology-heavy Kospi rose 1.9 per cent.
Powell on Wednesday refused to rule out lifting interest rates from pandemic-era record lows to stamp out soaring inflation, prompting futures markets to price in about five interest rate rises this year, starting in March.
“This cycle of rate hikes is set to begin with inflation at levels not seen since the early 1980s, with the Fed seeking to regain credibility after consistently underestimating inflation over the last year,” Deutsche Bank strategist Jim Reid wrote in a note.
Higher interest rates increase companies’ borrowing costs and lower the present value of forecast profits in investors’ models.
Money managers will focus on businesses “that can produce strong near-term earnings growth”, said Marija Veitmane, State Street senior multi-asset strategist.
Tighter monetary policy has caused money to seep out of speculative tech stocks this month, helping drive the Nasdaq Composite almost 18 per cent below its November all-time high.
“Last year, very accommodative policy lifted all the boats. Now, it’s about finding companies with strong near-term earnings and the right business model, and large-cap tech remains an area of strength,” Veitmane said
Shorter-term US Treasuries came under renewed selling pressure on Friday as expectations of higher interest rates on cash and persistent inflation made the fixed income securities less appealing.
The yield on the two-year Treasury note, which moves inversely to its price and tracks monetary policy expectations, rose 0.02 percentage points to 1.21 per cent. The five-year Treasury yield rose 0.03 percentage points to 1.69 per cent, with both yields around their highest levels since February 2020.
The dollar index, which measures the US currency against six others, was steady after climbing to its highest point in 18 months on Thursday.
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