Global stocks are falling due to fear of hawkish central bank increases

LONDON (Reuters) – Global stocks traded near their lowest in more than a month on Wednesday and US Treasury yields remained at their highest levels since November, as fresh concerns about inflation and interest rates weighed on market sentiment.

MSCI’s broad gauge of global stocks (.MIWD00000PUS) fell 0.4% to its lowest since Jan. 20, while a gauge of general index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 1.3% to its lowest since Jan. 6.

The European stock index STOXX 600 (.STOXX) fell 0.4% in early trade. Wall Street futures markets indicated that the S&P 500 would drift 0.2% after falling 2% in the previous session.

A surprisingly upbeat batch of data in recent weeks has led to a cross-asset price rally that began last October, which was based on a scenario of the global economy slowing enough to convince hawkish central banks to pause interest rate hikes.

Wall Street posted its worst daily performance this year on Tuesday, as investors responded to an unexpectedly strong reading from S&P Global’s composite Purchasing Managers’ Index with fears that strong business conditions will continue to fuel inflation.

“The market was overly optimistic,” said Luca Paolini, chief strategist at Pictet Asset Management.

“The economic data has been a lot more resilient than we thought (it will be) and we have to accept that.”

The MSCI all-country stock index, which rebounded 7.1% in January, is down 2% so far this month, weighed down by the US jobs report and concerns about prices, even as economists raised their forecasts for economic growth in the US and the eurozone this year.

The yield on the 10-year US Treasury note, which moves inversely to its price, fell by 2 basis points on Wednesday to 3.953%, after touching its highest level since November.

This was a reflection of the strong performance of Treasury bonds at the start of the year, when bonds rose to reflect bets of falling inflation. The benchmark 10-year yield rose nearly 60 basis points from its lowest level in January.

Swaps markets now expect the Federal Reserve, the world’s most powerful central bank, to raise its funds rate, currently set at 4.5%, to 4.75%.

New Zealand’s central bank raised interest rates by 50 basis points on Wednesday to a more than 14-year high of 4.75%, signaling more monetary tightening ahead.

“It’s about the market that central banks are going to have to raise interest rates a lot more to curb inflation,” said Kerry Craig, global market analyst at JPMorgan Asset Management.

Geopolitical tensions rattled markets on Wednesday after Russia’s Vladimir Putin warned the West over Ukraine to suspend the last major nuclear arms control treaty with the United States. US Secretary of State Antony Blinken said Putin’s move was “deeply unfortunate and irresponsible”.

The dollar index has been flat, but is on track for gains of 2% so far in February, which would be its first monthly gain in five.

Brent crude, the global oil benchmark, fell 0.8 percent to around $82 a barrel.

(Reporting by Naomi Rovnik) Additional reporting by Selina Lee. Editing by Bradley Perrett and Kim Coghill

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