By Tommy Wilkes
LONDON (Reuters) – Stock markets dropped on Friday, following on from a late slump in the U.S. as fears about the pace of monetary policy tightening and weaker-than-expected earnings from companies that soared in the pandemic hit investor confidence.
Oil prices pulled back too as another bout of risk aversion spread rapidly across markets and sent traders looking for safety in government bonds.
Disappointing subscriber growth at streaming giant Netflix, which sent its share price tumbling nearly 20% late on Thursday, added to nerves. Other stocks that boomed during the pandemic such as Peloton are also dropping fast as investors worry about slowing growth.
The Nasdaq, the standout performer of the stock market boom since the pandemic started, has fallen more than 10% from its peak and is on track for its worst week since 2020. Futures point to more losses on U.S equity markets when Wall Street opens.
In Europe, the Euro STOXX dropped 1.21%, the FTSE 100 0.76% and Germany’s DAX 1.34%.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1%, dragged by Australian shares, while Japan’s Nikkei stock index slid 0.9%.
Chinese shares were also weaker, even after China cut its benchmark mortgage rates on Thursday, the latest move in a burst of monetary easing aimed at propping up an economy soured by a troubled property sector and worries over the Omicron variant of coronavirus.
But the sharpest drops in recent days have been in U.S. markets.
“In the last two, three years, whether it was stocks, bonds, currencies, you had constant flows into the United States while great uncertainty built and it was the epicentre of the excess liquidity being created. And we’re just turning the movie backwards,” said Mike Kelly global head of multi asset at PineBridge.
He added that while the economy could handle rate hikes, markets might not and they needed to realise “the Fed is no longer your friend”.
The MSCI World Index, down 5% from its peak, is now having its worst month — at -4.3% — since markets tanked 13.7% in March 2020 when panic about COVID-19’s impact on economies set in.
The S&P 500 is having its worst month since late 2020.
GRAPHIC – S&P 500 stock index set for biggest weekly fall since late 2020
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WAITING FOR THE FED
Investors are anxiously awaiting the Federal Reserve’s FOMC meeting next week for details on how it intends to tackle high inflation. Markets now price in at least four rate hikes this year, and traders said to expect more volatility until the Fed provides some clarity on how fast it will tighten.
Market sentiment was also weakened by comments made by U.S. Treasury Secretary Janet Yellen on inflation, said Kyle Rodda, market analyst at IG Markets.
“Less than a week out from the FOMC meeting, investors are worried that the central bank is going to flag aggressive rate hikes and an imminent and rapid unwind of its balance. In effect, it may throw the stock market under the bus to stamp out inflation,” Rodda said.
In commodities, oil prices plunged after rising to seven-year highs this week, as an increase in U.S. crude and fuel stockpiles prompted investors to take profits from the rally.
U.S. crude fell 1.59% to $84.18 a barrel. Brent crude fell 1.53% to $87.03 per barrel. Both benchmarks have gained more than 10% so far this year amid concerns over tight supply.
U.S. Treasury yields were slightly lower along the curve, having risen sharply earlier in the week. [US/]
Yields on benchmark 10-year notes were last at 1.7919% after earlier ralling to 1.765% — their lowest in a week. 10-year yields hit a two-year high of 1.902% on Wednesday.
Germany’s 10-year bond yield fell back below zero after breaching the 0% mark for the first time since 2019.
Rising U.S. yields had helped the dollar to gain earlier in the week, although not by much and on Friday the dollar index eased 0.1% against a basket of six major currencies.
The euro rose 0.2% while the safe-haven Japanese yen also climbed.
(Additional reporting by Sujata Rao in London and Kanupriya Kapoor and Stella Qiu in Singapore; Editing by Raissa Kasolowsky, Kirsten Donovan)