Doubts on whether stock markets can ride out a tightening of US monetary policy dominated trade yesterday, sending major US stock indexes down more than one per cent, while the dollar edged higher against a basket of major currencies.
The dollar edged higher against a basket of major currencies after US labour market data bolstered expectations for a more hawkish Federal Reserve.
Wall Street tumbled, with the S&P 500 falling more than 1.25 per cent during the morning session. The day’s broad decline sent the Dow and S&P 500 negative for July.
Weak US data contributed to the bearish tone as claims for jobless benefits rose more than expected in the latest week, and the Chicago Purchasing Managers Index unexpectedly fell in July to its lowest since June 2013.
US Treasuries yields rose as rising labor costs led some investors to prepare for a greater likelihood that the Federal Reserve will increase interest rates next year, while others feared that inflation may be a higher risk if the US central bank is too slow to hike rates.
“Starting with GDP yesterday, it certainly set things off,” said Ira Jersey, an interest rate strategist at Credit Suisse in New York.
“In general, you have decent data and if the Fed’s behind the curve, you will wind up with inflation running a little bit higher than people thought.”
Gross domestic product data released on Wednesday showed a strong rebound in the second quarter from a weak start to the year.
The US dollar edged higher against a basket of major currencies as the weak labor market data bolstered expectations for a more hawkish Fed, though traders are hoping for a strong US nonfarm payrolls report today.
The US dollar index, which measures the dollar against a basket of six major currencies, was last up 0.03 per cent at 81.456, down from a 10-and-a-half-month high of 81.573 touched earlier in the session.
The euro was last down 0.07 per cent against the dollar at $1.3387, just above an eight-month trough.
The dollar was up 0.07 per cent against the Japanese yen at 102.85 yen, but was down 0.02 per cent against the Swiss franc at 0.9085 franc.
The benchmark 10-year US Treasury note yield rose to 2.56 per cent, from 2.55 per cent late on Wednesday.
The Dow Jones industrial average fell 174.39 points, or 1.03 per cent, at 16,705.97. The Standard & Poor’s 500 Index was down 24.80 points, or 1.26 per cent, at 1,945.27. The Nasdaq Composite Index was down 68.39 points, or 1.53 per cent, at 4,394.51.
MSCI’s All-World Index was down 1.1 per cent and European shares fell 1.2 per cent.
Eurozone data yesterday showed inflation slowing to just 0.4 per cent, and the pan-European FTSEurofirst 300 index was down one per cent by midday.
A warning by sports group Adidas about its business in Russia underlined the threats facing European companies. Another worry for some European companies was Argentina’s second default in 12 years, following the failure of last-minute efforts toward a deal with holdout creditors.
While debt insurance costs suggested an eventual agreement still seemed possible, the default helped fuel weakness in Spanish and French shares, traders said, with Madrid’s main index down 2.4 per cent.