Newsletter: Unhedged

US stocks fell on Friday to their lowest level in almost a month while Treasuries rallied, as investors grappled with signs of slowing global economic growth and the implications for monetary policy.

The S&P 500 index fell by around 0.9 per cent during afternoon trading on Friday, its lowest point in four weeks, having lost about 2 per cent in September so far.

The technology-focused Nasdaq Composite fell by 1.1 per cent as both indices approached a second consecutive weekly fall.

In Europe, the Stoxx 600 equity gauge fell 0.9 per cent, finishing the week down 1 per cent.

The yield on the 10-year US Treasury note added 0.03 percentage points to 1.368 per cent ahead of the Federal Reserve’s meeting next week, at which it is expected to offer clues about when it will reduce its $120bn a month of crisis-era bond purchases.

“Markets are lacking direction because we are expecting a turning point for the Fed to act, but the question is when,” said Juliette Cohen, strategist at CPR Asset Management. 

The bond-buying programme, which started in March last year, has lifted prices of Treasury notes and lowered their income yields, boosting the relative appeal of equities.

A housing boom, annual consumer price inflation running in excess of 5 per cent and wage increases have prompted some members of the Fed’s monetary policy-setting committee to call for the bond purchases to be reduced.

But analysts do not widely expect the reductions to begin until the end of this year.

“We see tapering [of bond purchases] as a six to eight-month process starting in December and then for [interest] rates to rise around the turn of next year,” said Christopher Jeffery, head of rates and inflation strategy at Legal & General Investment Management.

In Europe, the Stoxx 600 index had spent most of Friday in the black before turning lower to reflect the cautious mood on Wall Street.

The People’s Bank of China injected an extra $14bn of short-term funds into the country’s banking system on Friday, its most since February. Analysts viewed this as a move to ease lending conditions following a debt crisis at the major homebuilder Evergrande and a coronavirus-driven slowdown in retail sales, industrial production and the property market.

The struggling property developer’s shares fell 3.4 per cent on Friday in Hong Kong for a weekly fall of 29.8 per cent.

European travel shares rallied throughout Friday as UK media reports suggested the government would ease restrictions and quarantine rules in time for the school half-term break. By the closing bell in London, shares in the British Airways owner IAG were almost 5 per cent higher and the package holiday provider Tui was up 6 per cent.

In debt markets, the yield on Germany’s 10-year Bund, which moves inversely to its price and reflects interest rate expectations in the eurozone, rose 0.2 points to minus 0.28 per cent. Italy’s equivalent bond yield rose 0.03 points to 0.721 per cent.

On Thursday the Financial Times revealed unpublished inflation forecasts by the European Central Bank that suggested it was on course to raising eurozone interest rates in just over two years. “The conclusion by the FT that a lift-off of interest rates could come already in 2023 is not consistent with our forward guidance,” the bank said.

Brent crude, the oil benchmark, fell 1 per cent to $74.90 a barrel. The dollar rose 0.3 per cent.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday