US Fed’s inflation remarks weigh on European stocks

Global equities and government bond price remained under pressure on Friday, following comments from Federal Reserve chairman Jay Powell.

Bond prices have been sliding in the opening weeks of this year, in a move that has accelerated in the past two weeks.

Some analysts and investors had expected Powell to use his slot at an event hosted by The Wall Street Journal on Thursday to lend some at least verbal support to the market, perhaps even signalling a willingness formally to hold yields down.

Yields

Instead, while he said the recent pick-up in yields – the flip side of falling prices – was “notable”, and that the US central bank would be “patient” in the face of a temporary rise in inflation, he gave no sense of immediate alarm. Yields on 10-year US Treasuries jumped 0.07 percentage points to 1.55 per cent on Thursday, and remained in that area in Europe on Friday.

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“It looks like words are not enough,” said Joost van Leenders, senior investment strategist at Kempen Capital Management.

“There’s still a lot of unrest with rising yields. . .historically rising yields aren’t bad for equities, the reason why it’s different this time is a lot of equities have high valuations, which are justified by low yields.”

In Europe, the region-wide Stoxx 600 index fell 0.7 per cent in morning trading. London’s FTSE 100 benchmark fell 1.2 per cent, while Germany’s Xetra Dax lost 0.9 per cent.

In Asia, China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2 per cent before pulling back to be down 0.3 per cent by the end of the morning session, after Beijing set a target of “above 6 per cent” for economic growth in 2021.

Premier Li Keqiang hailed China’s recovery from an “extraordinary” year and said the government wanted to create at least 11 million urban jobs at a meeting of the National People’s Congress, the annual meeting of the country’s rubber-stamp parliament.

Growth

“A target of over 6 per cent will enable all of us to devote full energy to promoting reform, innovation and high-quality development,” Li said, adding that Beijing would “sustain healthy economic growth” as it kicked off the new five-year plan.

Analysts were less sanguine on China’s economic outlook, however, pointing to the markedly lower growth target relative to recent years.

“There is, in fact, not much surprise from the government work report except for the super-low GDP target,” said Iris Pang, chief economist for Greater China at ING, who estimated growth would be 7 per cent this year.

“This makes me feel uneasy as I don’t know what exactly the government wants to tell us about the recovery path it expects.”

The S&P 500, which closed Thursday’s session down 1.3 per cent, was tipped by futures markets to fall another 0.4 per cent when trading begins on Wall Street.

Brent crude, the international benchmark, rose 1.5 per cent to $67.77 a barrel. “The strong performance in commodities suggests that it is one asset class where investors have moved,” said van Leenders. – Copyright The Financial Times Limited 2021