US stocks and government bond yields edged down after the Federal Reserve raised interest rates for the first time since 2018 and oil soared as the market’s focus returned to the Ukraine war.
The S&P 500 declined 0.4% in early trading, after the broad-market index closed more than 2% higher on the past two consecutive days. The Nasdaq Composite Index fell 0.7%, as technology stocks suffered modest losses after the opening bell. The Dow Jones Industrial Average dropped 0.4%, or 130 points.
Stocks had begun to stage a comeback in recent days after losses related to surging energy prices, the impact of Western sanctions on Russia, and uncertainty about how major central banks would react. Investors said they were focusing on the resumption of cease-fire talks between Ukraine and Russia but reports of Moscow citing little progress weighed on sentiment.
“This shows that we’re not at the end of this conflict, that the commodity price situation is not going to improve which makes it tougher for sentiment,” said Esty Dwek, chief investment officer at FlowBank. “We’re also still digesting the Fed, it was clearly more hawkish than expected.”
Fed officials penciled in six more interest-rate increases by year’s end, as the US central bank moved more aggressively to slow inflation, which is running at a four-decade high.
“The Fed recognized that hikes will slow growth. The question is now how much will the tightening of the economy slow growth. That’s what markets are looking for,” said Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management.
Other investors saw the Fed’s move as potentially supportive. Although the central bank’s stance has become more hawkish, it “wants to try to engineer a soft landing, and that’s actually quite a positive outcome for equities,” said Adrian Zuercher, the head of global asset allocation at UBS’s chief investment office.
Mr. Zuercher pointed to signs that the Fed was willing to tolerate inflation overshooting its 2% target—most officials now see core inflation ending the year at 4.1%—as indicating that policy makers were focused on not scuttling the economic recovery.
The yield on the benchmark 10-year Treasury note edged down to 2.159% from 2.185% on Wednesday, reversing direction after three straight days of rises. Yields rise when prices fall. Selling of shorter-dated bonds, which are more heavily affected by changes in monetary policy, also eased with the two-year yield declining to 1.938% after climbing for eight trading sessions.
Government bonds typically perform well in times of slower economic growth, which some investors now expect due to the Fed’s plans to tighten the economy. “There’s also an element of risk-off from the conflict,” said Ms. Dwek.
Commodity markets also showed signs of stress from the Russia-Ukraine conflict. Oil prices rose, with Brent crude adding 7% to trade at $104.85 a barrel.
Traders said they still have concerns about longer-term energy supplies and that the shunning of Russian oil by shipping companies and banks is hitting the market now due to preplanned trades ahead of the invasion. The International Energy Agency said in a Wednesday report that sanctions on Russia could create a supply shock.
The price of gold, a traditional haven asset, climbed 1.8% to around $1,943 a troy ounce.
The pan-continental Stoxx Europe 600 edged down 0.3%. German industrial company Thyssenkrupp tumbled 9% after it pulled its guidance for free cash flow, citing the war in Ukraine and rising raw material prices. Deutsche Bank cut its price target for the stock.
The Bank of England raised its key policy rate to 0.75% from 0.5%, marking the third straight hike in as many meetings. The central bank said that economic growth in Britain was likely to slow due to higher energy prices and softened its guidance for further monetary tightening, investors said. UK government bonds rallied and the British pound weakened 0.4% against the dollar.
The Russian stock exchange remained closed and the ruble depreciated 7% against the dollar, trading at around 105 rubles to $1. It has lost 28% of its value since the beginning of the year.
Chinese shares rallied for a second day, with Hong Kong’s Hang Seng Index advancing more than 7% and the Shanghai Composite Index rising 1.4%.
Among big Chinese technology companies, shares in Tencent Holdings gained 6% and Meituan emerged 12%. Beaten-down property shares also rocketed higher, with Country Garden Holdings adding 28%.
Supportive government comments had fueled a huge recovery in Chinese stocks Wednesday after several days of heavy selloffs, with the Hang Seng staging its biggest single-day rally since 2008 and many tech shares jumping more than 30%.
China’s market will likely remain extremely volatile over the next few weeks, partly due to the war in Ukraine, as China relies on Russia for some commodity imports, said Mr. Zuercher at UBS. Extended lockdowns could also reduce company earnings, if China cannot bring its Covid-19 outbreaks under control soon, he added.
Key equity indexes in Australia and South Korea gained more than 1% in Thursday’s trading, while Japan’s Nikkei 225 surged nearly 3.5%.
Weekly jobless claims in the US came in at 214,000, a decrease from the previous week and in line with economists’ expectations. The proxy for layoffs has been hovering close to historically low levels amid the tight labor market.
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