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Stocks drop on higher rates narrative after solid PMIs

Expanding business activity on both sides of the Atlantic suggest the US and European economies could be able to handle higher rates for longer. Stock markets came under pressure and yields on government debt shot up following the Purchasing Manager Indices (PMI) released Thursday as traders reassessed their expectations for rate cuts by key central banks.

Shane Strowmatt, LGT
Temps de lecture
5 minutes
Falling market
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Flash US Composite PMI increased to 54.4 points in May, the highest level since April of 2022. On the other side of the Atlantic, the flash Composite PMI for the euro area rose to 52.3 points in May, its highest in a year as well. A level above 50 signals expansion. The data suggest that the US and European economies are capable of performing well despite higher interest rates. Consequently, US Treasury yields spiked as traders braced for higher rates for longer. Yields on two-year Treasuries were approaching the psychologically important 5% hurdle on Thursday and ten-year yields were near 4.5%.

In New York, stock indices started trading strong on Thursday, bolstered by Nvidia’s expectation-beating quarterly results released after the bell on Wednesday. But the high-for-longer took over sentiment later with the Dow Jones Industrial closing down 1.5% and the S&P 500 losing 0.7%. The tech-heavy Nasdaq-100 fell 0.4%, despite Nvidia shares jumping more than 9% on Thursday. The stock has more than doubled this year as the company has been a primary beneficiary of the recent artificial-intelligence-driven stock market rally.

In Europe, more economic data signalled the European Central Bank (ECB) may be able or forced to wait longer than expected before lowering rates. Negotiated pay in the euro area increased by 4.7% in the first quarter when compared to the same period a year earlier. In the previous quarter, it was up 4.5%. Wage growth generally puts upward pressure on prices as it puts more money in the pockets of consumers. The EuroStoxx 50 closed 0.2% higher on Thursday.

In the Asia-Pacific region, stock markets were trading lower across the board to finish the week. In Tokyo, the Nikkei 225 was down 1.2% after core inflation - which excludes fresh food and energy prices - came down to 2.2% in April on an annual basis from 2.6% in the previous month. Headline inflation was 2.5% in April. In South Korea, the Kospi was trading 1.3% lower due to a roughly 3% loss at its largest constituent, Samsung. In Australia, the S&P/ASX 200 lost 1.1%. Hong Kong's Hang Seng Index was the region’s biggest loser, down 1.5%, while the Shanghai Composite was trading 0.3% lower.

Corporate news in focus: There is no major corporate news scheduled today.

Economic data in focus: UK retail sales, German gross domestic product, Swiss National Bank Chairman Thomas Jordan speaks, Canada retail sales, US durable goods orders, University of Michigan Consumer Sentiment Index.


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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