Wall Street stocks fell as US policymakers paused negotiations over the debt ceiling deal and nerves over the health of the US regional banking sector returned.
Investors on Friday bought short-dated US Treasuries and lowered their expectations that the Federal Reserve would raise interest rates in June after chair Jay Powell warned tighter credit conditions — the result of the turmoil at US banks — may mean the Fed will not have to raise interest rates as high to reach their 2 per cent inflation target.
Meanwhile, Republican lawmakers walked out of negotiations to avert a US default. The pause stokes the risk of an unprecedented national default back on the table.
Gains on Wall Street from earlier in the session had evaporated by late morning. The benchmark S&P 500 closed 0.1 per cent lower on Friday, but gained 1.7 per cent in the week. The tech-heavy Nasdaq Composite fell 0.2 per cent, but chalked up its fourth straight week of gains with a 3 per cent advance.
Following Powell’s comments, pricing in the futures market showed investors were only betting on an 21 per cent chance the Fed would raise interest rates again at its meeting in June. Earlier Friday, those expectations had been about 40 per cent.
The yield on interest rate-sensitive two-year Treasury notes rose fractionally to 4.27 per cent, but had swung between gains and losses. The yield on the benchmark 10-year note was up 0.03 percentage points at 3.68 per cent. Bond yields rise when prices fall.
US regional bank stocks stumbled after CNN reported Treasury secretary Janet Yellen told bank chief executives this week that more mergers in the sector may be necessary. The KBW Regional Banking index fell 2.2 per cent on Friday.
“The biggest news item was the disappointment in Republican negotiators walking out of the meeting,” said Jack Ablin, chief investment officer at Cresset Capital. “I think there had been a fair amount of optimism . . . so that was a setback”.
The greenback fell 0.4 per cent against a basket of peers, while the price of gold, a haven asset, rose 0.9 per cent to $1,975.96 an ounce.
Germany’s Dax rose 0.7 per cent to close at a record high of 16,275 although it gave up further advances as markets turned. Europe’s region-wide Stoxx 600 rose 0.7 per cent while France’s CAC 40 added 0.6 per cent, extending gains from the previous session.
“In Europe, and as a result Germany, earnings have done much better than implied by macroeconomic indicators,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
Germany’s producer price index for April showed the annual rate of inflation had fallen to 4.1 per cent compared with 6.7 per cent in March. The reading was 0.1 percentage points higher than the forecast of economists polled by Reuters.
The index in Frankfurt has gained 17 per cent since the start of the year, lifted in part by strong earnings in the industrials sector.
“There were supply constraints, so [Germany] couldn’t produce cars to match demand . . . the semiconductor shortages have really gone away now, so they have been able to increase production,” said Chris Hiorns, a fund manager at EdenTree.
Asian stocks fell, as pessimism over the tech sector stopped the US rally from spreading to the region.
Hong Kong’s Hang Seng index retreated 1.4 per cent, while China’s benchmark CSI 300 stock dropped 0.3 per cent after weak third-quarter results from tech giant Alibaba damped investor sentiment.
China’s onshore currency fell 0.4 per cent to 7.01 against the US dollar, its lowest level since December after China’s April data showed weak consumer spending and industrial production, as well as record-high youth unemployment. The numbers pointed to a faltering economic recovery following the unwinding of its zero-Covid curbs last year.
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