Global stocks drift lower after renomination of Jay Powell

Global stocks dropped on Tuesday led by a slide in technology shares, as traders weighed Jay Powell’s nomination for a second term as Federal Reserve chair and the further surge of coronavirus cases across Europe.

The tech-focused Nasdaq Composite index closed 0.5 per cent lower, while Wall Street’s blue-chip S&P 500 index closed 0.2 per cent higher. The share gauges had ended Monday’s session down 1.3 per cent and 0.3 per cent respectively. The FTSE All World index finished lower for a third consecutive day, falling 0.2 per cent.

Since fast-growing tech stocks are often more sensitive to changes in interest rate policy, they have moved dramatically as traders have started to bet on more hawkish policy from the US central bank under Powell.

Brian Nick, chief investment strategist at Nuveen, said that despite a brief sell-off after Powell’s renomination was announced on Monday, there was “no sense of a panic or that markets were hoping for a different outcome”.

Fed fund futures — a market for hedging against or betting on future interest rate moves — are pointing to a roughly 75 per cent chance that the central bank lifts US interest rates from historic lows by June next year, up from about 60 per cent a month ago, according to data compiled by CME Group.

The shift was reflected in short-term US government bonds. The yield on the two-year US Treasury note rose to its highest level since March last year early on Tuesday, hitting 0.64 per cent. At the end of the New York day it was hovering slightly below that level at 0.61 per cent. The yield on the debt, which is sensitive to fluctuations in monetary policy expectations, was less than 0.3 per cent at the start of October.

Longer-term bond yields have been steadier, reflecting expectations that the surge in inflation that is pushing central banks around the world to begin removing their pandemic-stimulus efforts will cool over the medium term. The 10-year Treasury yield rose 0.06 percentage points on Tuesday to 1.68 per cent.

“If short-term rates move up and long-terms don’t or move down, that’s a sign the market thinks the Fed has made a mistake,” Nick said.

JPMorgan strategists said that, overall, “Powell’s reappointment reduces uncertainty, and hence should be a positive for risk assets”.

“Historically, markets try to test new Fed chairs, so we believe this outcome will be avoided,” the Wall Street bank said in a note to clients. “Additionally, Powell’s experience from the second half of 2018, where policy tightening contributed to the strong market sell-off into year-end, will likely result in a cautious approach to lift-off next year.”

Also on Tuesday, the Treasury department auctioned off $59bn of new seven-year notes to strong demand. The yield on the seven-year note was its highest since February 2020 going into the auction, which bolstered demand, said Tom Simons, an economist at Jefferies.

In Europe, the regional Stoxx 600 index closed down 1.3 per cent. Several countries in the EU were last week forced to reimpose pandemic restrictions because of surging coronavirus case numbers, leading to multiple protests over the weekend.

Bringing in new curbs in parts of Europe had “shaken a key market belief, to the extent that it was thought developed economies wouldn’t go back down that route”, said Paul Donovan, chief economist at UBS Wealth Management.

Asian equities moved slightly lower on Tuesday, with the MSCI All Country Asia Pacific index off 0.4 per cent in US dollar terms. Hong Kong’s Hang Seng share gauge dipped 1.2 per cent.

In currencies, the euro on Tuesday hit its weakest level against the dollar since July 2020 at $1.123.

The Turkish lira hit its weakest point against the dollar on record after the country’s president Recep Tayyip Erdogan praised last week’s 1 percentage point rate cut and said his country was fighting an “economic war of independence”. Turkey last week cut its interest rate to 15 per cent, despite annual inflation running at 20 per cent.

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