European stocks slipped on Tuesday after a heavy sell-off overnight on Wall Street, when traders took hotter than expected US services data as a signal for further interest rate raises from the Federal Reserve.
The regional Stoxx Europe 600 and London’s FTSE 100 fell 0.6 per cent and 0.4 per cent, respectively, in early trading.
Contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both traded in a tight range ahead of the New York open, after a sharp sell-off for US equities in the previous session.
The S&P 500 and the Nasdaq Composite on Monday endured their largest daily declines since the day after the US midterm elections following a report from the Institute for Supply Management showed that its index, which tracks economic activity in the services sector, expanded for the 30th month in a row in November, rising to 56.5 from 54.4 in October.
The unexpectedly strong figure was interpreted by investors as a sign that the Fed may yet have to keep the world’s most important interest rate higher for longer in an attempt to cool the US economy. A cycle of rate rises has lifted the federal funds rate to a target range of 3.75 per cent to 4 per cent from zero at the start of the year.
“The latest ISM data underline the divergences evident in the US economy as spending continues to shift from goods to services,” said Mark Haefele, global chief investment officer for UBS’s wealth management group, pointing to November’s contraction in the US manufacturing sector.
“While inflation has likely peaked, price pressures in the services sector are proving slow to abate,” Haefele added, noting that “good economic news” lowered the chances of a so-called Fed pivot around inflation expectations.
Fed chair Jay Powell said in a speech last week that although price growth showed signs of cooling in October, “by any standard, inflation remains much too high”. Trading in futures markets shows investors expect US interest rates to peak at about 5 per cent next spring before falling slowly toward the end of 2023.
US government bonds rallied on Tuesday after selling off sharply following the ISM release, though sections of the Treasury market continue to signal an impending recession. The yield on the interest rate-sensitive two-year Treasury fell 0.02 percentage points to 4.37 per cent. The yield on the benchmark 10-year note also lost 0.02 percentage points at 3.58 per cent. Yields fall as prices rise.
Short-term debt yielding more than long-term debt tends to indicate an impending recession, and Julian Howard, lead investment director at GAM, said the Treasury market was “correctly hinting that the [US] economy is going to get really, really hit”.
In Asia, meanwhile, Hong Kong’s Hang Seng index shed 0.4 per cent, though the index has rallied more than 17 per cent since its late October low. China’s CSI index of Shanghai- and Shenzhen-listed stocks gained 0.5 per cent as zero-Covid policies were eased across the country.
In commodity markets, the price of Brent crude, the international benchmark, fell 1.2 per cent to $81.61 a barrel.