Wall Street stocks quickly reversed course on Friday after U.S. policymakers stalled talks on a debt ceiling deal and jitters over the health of the U.S. regional banking sector returned.
Investors bought U.S. Treasuries and lowered expectations that the Federal Reserve will raise interest rates in June after Chairman Jay Powell warned that tighter credit conditions – a result of the turmoil at U.S. banks – could mean the Fed would not must raise interest rates as high as possible to reach its 2 percent inflation target.
Meanwhile, Republican lawmakers have walked out of talks to avert a U.S. bankruptcy. The shutdown put the risk of an unprecedented national bankruptcy back on the table.
Wall Street’s early gains evaporated. The benchmark S&P 500 lost 0.2% and the tech-heavy Nasdaq Composite fell 0.3%.
After Powell’s comments, futures market pricing showed investors were betting on just a 22 percent chance the Fed would raise interest rates again at its June meeting. Earlier on Friday, those expectations were around 40 percent.
The yield on interest-sensitive two-year Treasuries slipped 0.07 percentage points to 4.26 percent. The yield on the benchmark 10-year bond rose 0.02 percentage points to 3.66 percent. Bond yields rise when prices fall.
Meanwhile, banks in the U.S. region stumbled after CNN reported that Janet Yellen, the U.S. Treasury secretary, told bank executives this week that more mergers may be needed. The regional banking index KBW fell 3 percent on Friday.
Germany’s Dax rose 0.7% to close at a record high of 16,275, although it gave up further progress as markets turned around. Europe’s regional Stoxx 600 rose 0.8 percent, while France’s CAC 40 added 0.6 percent, extending gains from the previous session.
“In Europe, and as a result in Germany, earnings are much better than macroeconomic indicators suggest,” said Klaus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
Germany’s producer price index for April showed the annual rate of inflation fell to 4.1 percent, down from 6.7 percent in March. The reading was 0.1 percentage points higher than the forecast of economists polled by Reuters.
The Frankfurt index has risen 17% since the start of the year, lifted in part by strong gains in the industrials sector.
“There were supply constraints, so (Germany) couldn’t produce cars to meet demand. . . the semiconductor shortage is now really gone, so they’ve been able to increase production,” said Chris Hearns, fund manager at EdenTree.
The dollar index, which tracks the U.S. currency against a basket of six rivals, fell 0.4 percent.
Asian shares were lower as pessimism around the technology sector stopped the rally in the US from spreading across the region.
Hong Kong’s Hang Seng index fell 1.4 percent, while China’s benchmark CSI 300 fell 0.3 percent after weak third-quarter results from tech giant Alibaba dampened investor sentiment.
China’s national currency fell 0.1 percent to 7.027 against the U.S. dollar, its lowest level since December, after China’s April data showed weak consumer spending and industrial production, as well as record high youth unemployment. The figures pointed to a shaky economic recovery after the lifting of zero-Covid restrictions last year.
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