Stocks and bonds sink as investors brace for further Fed tightening

European stocks fell and yields on US government debt rose on Thursday after minutes from the Federal Reserve’s last policy meeting indicated the central bank would resume interest rate increases to stamp out high US inflation.

The pan-European Stoxx 600 lost 1.2 per cent, edging towards its lowest point since May, while France’s Cac 40 fell 1.8 per cent and London’s FTSE 100 dropped 1.3 per cent.

Property companies led declines across the board and the Stoxx 600 Real Estate index dropped 2.3 per cent, as investors feared that high interest rates around the world could hit house prices and limit bank lending.

The falls followed the release of minutes from the June meeting of the rate-setting Federal Open Market Committee, which signalled that “almost all” participating officials believed additional increases in the Fed’s benchmark rate would be “appropriate”. They also characterised inflation as “unacceptably high”.

The June meeting had marked a break from the Fed’s relentless drive to bring down inflation from a multi-decade high last year. It was the first time the US central bank opted to keep the federal funds rate unchanged in 10 consecutive meetings.

Contracts tracking the S&P 500 and the Nasdaq 100 both fell 0.4 per cent ahead of the New York open.

The yield on the policy-sensitive two-year Treasury rose 0.02 percentage points to 4.97 per cent, hitting its highest point since the regional banking crisis in early March. The yield on the benchmark 10-year note rose 0.03 percentage points to 3.98 per cent. Bond yields rise as prices fall.

“Presuming the upcoming employment and consumer price index reports continue the themes that bothered [Fed officials] last month, we reckon the odds of a rate hike on July 26 have increased,” said Stephen Innes, managing partner at SPI Asset Management in Hong Kong.

The Vix volatility index, popularly known as “Wall Street’s fear gauge”, jumped 0.7 percentage points to 14.9, as investors fretted that a prolonged period of high borrowing costs could soon weigh on the US economy.

Investors will pay close attention to US payrolls data released on Friday, with economists polled by Bloomberg tipping that the pace of hiring slowed in June. However, the median forecast has underestimated jobs data for 14 consecutive months.

Hong Kong’s Hang Seng index led markets lower with a fall of 3 per cent, while the CSI 300 index of Shanghai- and Shenzhen-listed shares fell 0.7 per cent. Japan’s Topix gave up 1.3 per cent.

Sentiment in Hong Kong was also weighed by growing expectations of monetary easing that could squeeze Chinese banks’ returns. The Hang Seng Mainland Banks index was down almost 6.5 per cent, with some of the banks trading ex-dividend.

“If you lower interest rates, it means banks’ profits will fall and the renminbi will test lower levels as well,” said Louis Tse, founder of Hong Kong-based Wealthy Securities. “These factors are pushing investors to sell Chinese bank stocks.”

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