European stocks fall after initial gains
Dollar regains strength on hawkish Fed speak
Micron gloom plagues chipmakers
Oil and metal prices fall in commodity markets
By Mark Jones
LONDON, Nov 17 (Reuters) – European markets were rattled on Thursday by fears of a recession and interest rates, and the pound began to fall as Britain looked to put its disastrous recent fiscal experiment behind it with an austere-looking budget.
This was driven by renewed Fed policymakers’ talk that rates could rise further. That meant the dollar was fractionally higher after the recent 7% slump, although lower government debt yields in Europe suggested bond markets were largely indifferent.
Sterling moved to $1.1850 from $1.193 against the greenback in London as the country’s new finance minister, Jeremy Hunt, launched his budget plans on news of a 55 billion pound ($64.93 billion) tax hike and spending cuts.
He and Prime Minister Rishi Sunak hope it will restore confidence after former prime minister Liz Truss’s pointless tax cut plan sparked widespread panic, sent the pound to an all-time low and forced Truss to resign after 50 days in office.
DoubleLine portfolio manager Bill Campbell said the pound’s rebound last month meant the budget’s main headlines had probably already been priced in and Britain’s experience could be mirrored elsewhere, particularly with the recession and ongoing energy crisis.
“The market has basically told the UK government not to take anything too aggressive on the fiscal stimulus front,” Campbell said.
“It looks like we’re moving into a fairly risky environment,” he added, referring to the possibility that EU countries will try to borrow them next year. “I think it is very likely that we will see some repeat of what happened in the UK”.
Overnight in Asia, serious signals about Micron Technology’s excess inventory and sluggish demand weighed on chipmaker stocks.
On Wall Street, stronger-than-expected U.S. retail sales suggested the Federal Reserve was unlikely to relax its fight against inflation, and futures pointed to another modest decline later.
In a move that fueled concerns about the economic outlook, the US Treasury yield curve inverted sharply in European trade, suggesting investors brace for a slowdown.
The 2-year/10-year curve closed below -60 bps on Wednesday for the first time since 1982 “It’s concerning when you consider its historical accuracy as a leading indicator of a recession,” said Deutsche Bank’s Jim Reid.
Hong Kong’s Hang Seng index closed down 1.15% while technology stocks fell as much as 4% at one point. Mainland Chinese shares also faltered, with blue chips down 0.5% after having ripped more than 10% this month.
Japan’s Nikkei fell 0.35% and South Korea’s Kospi fell 1.4%, each led by heavyweight chip players.
The Philadelphia SE Semiconductor Index fell 4.3% and the tech-heavy Nasdaq fell 1.5% after Micron said it would reduce memory chip supplies and further scale back its capital spending plan.
Wall Street futures hinted little at rest at the open, falling 0.5%-0.6% later on the Nasdaq or the S&P.
Traders will scrutinize speeches from Fed officials on Thursday for hints about a rate hike. Regional Fed Presidents Raphael Bostick, Loretta Mester and Neil Kashkari will all speak.
Hawkish comments from Fed officials on Wednesday raised doubts about the policy change, with San Francisco Fed President Mary Daly — one of the most dovish officials until recently — saying a break was off the table and that “somewhere between 4.75 and 5.25 seems a reasonable place” to target with rates. For Fed.
Money markets give 93% odds that the Fed will slow to a half-point rate hike on Dec. 14, with a 7% chance of another 75 basis point increase. Traders still see terminal rates closer to 5% by next summer, from the current policy rate of 3.75-4%.
The dollar’s DXY index rose about 0.5% as momentum regained momentum. The euro fell to $1.03, the risk-sensitive Aussie dollar weakened 1% and China’s yuan weakened 0.35% as new COVID cases sparked concerns that officials may order more lockdowns.
The Japanese yen didn’t do much either, falling to 139.85 per dollar even as it continued to trade near its highest level in three months. The dollar fell 3.7% last week after US consumer inflation data for October came in lower than expected.
“The Fed’s commentary, like the elastic spending numbers, provided little support for anyone looking for an impending pivot,” Ted Nugent, an economist at National Australia Bank, wrote in a client note.
The US 10-year Treasury yield bounced modestly from a six-week low of 3.671% overnight in Tokyo trading, having last stood at around 3.72%, while the two-year yield rallied near its lowest level since Oct. 28 at around 4.37%.
Against a firmer dollar, gold fell 0.6% to around $1,763 an ounce.
Crude in Europe settled more than a dollar lower overnight after shipments of Russian oil through the Druzhba pipeline resumed in Hungary and as rising COVID-19 cases weighed on sentiment in China.
Brent crude futures were last at $92.30 a barrel, having fallen below $92 overnight, while US West Texas Intermediate (WTI) crude was at $84.85 a barrel.
($1 = 0.8471 pounds)
(Additional reporting by Kevin Buckland in Tokyo; Editing by Barbara Lewis and Bernadette Baum)