US stocks fell and bond yields surged after data showed the vast American services sector was still growing, even though the Federal Reserve has been trying to cool the world’s biggest economy with aggressive interest rate rises.
Wall Street’s benchmark S&P 500 index fell 1.8 per cent and the tech-heavy Nasdaq Composite lost 1.9 per cent in the session. Both indices had their largest daily declines since November 9, the day after the US midterm elections.
The declines followed the release on Monday morning of a report from the Institute for Supply Management showing its index tracking economic activity in the services sector expanded for the 30th month in a row in November, rising to 56.5 from 54.4 in October. Economists polled by Reuters had expected the index to decline to 53.3. A number over 50 signals growth.
The decline for US stocks partly reversed Wall Street’s steady march higher over the past fortnight on hopes that inflation may have peaked, which could prompt the Fed to this month slow its pace of rate rises.
Andrew Hunter, senior US economist at Capital Economics, warned the services sector was unlikely to remain quite so buoyant for long, however.
“We suspect that resilience will fade next year, as higher interest rates start to take a bigger toll,” Hunter said.
The US dollar index, a measure of the US currency’s strength against six of its peers, rose 0.8 per cent as traders reassessed the inflationary outlook.
Prices of US government bonds fell, with the yield on the interest rate-sensitive two-year Treasury rising 0.12 percentage points to 4.40 per cent. The yield on the benchmark 10-year note added 0.1 percentage points to 3.6 per cent.
Oil markets fell, with international benchmark Brent crude declining by 3.4 per cent to $82.68 a barrel after the Opec cartel and its allies opted not to alter its production targets in response to the EU’s move to bar seaborne Russian crude imports, which took effect on Monday. US benchmark West Texas Intermediate dropped 3.8 per cent to $76.93 a barrel.
Russian output was expected to fall “moderately” following the EU’s ban, before dropping off again in February when western restrictions on the country’s refined petroleum products kicked in, said analysts at UBS.
Reports that several cities across China had relaxed Covid-19 restrictions boosted equities in Asia. Hong Kong’s Hang Seng index finished 4.5 per cent higher. The index has risen more than 17 per cent in the past month. China’s CSI 300 index added 2 per cent.
Top movers in the latter included China Railway Group and infrastructure group China Communications Construction, both of which gained more than 10 per cent.
“Investor confidence in China-related assets and currencies is being boosted by reopening optimism,” said MUFG currency analyst Lee Hardman, who added that the dollar remained “vulnerable” to further weakening even after slipping more than 8 per cent from its late September high.
Elsewhere in equity markets, Europe’s regional Stoxx 600 fell 0.4 per cent after data out on Monday showed a 1.8 per cent decline in eurozone retail turnover in October — the biggest monthly drop of the year. London’s FTSE 100 rose 0.2 per cent.
