Investors fled into the safety of bonds and stocks wavered as a lurch toward higher interest rates together with weak euro-area activity data heightened anxiety that aggressive central bank policy will tip economies into recession.
Global stocks headed for their biggest weekly decline in more than three months. European shares fluctuated, with a record 36% drop in Siemens Energy AG’s shares after a profit warning dragging on the broader market. Defensive sectors such as health care gained. US index futures fell.
The second-quarter stock rally is fraying under the threat of more rate hikes and fears that the full economic impact of aggressive rate increases has yet to be felt. Federal Reserve Chair Jerome Powell said the US may need one or two more rate increases in 2023.
“The market has not yet digested the lagged impact of tighter Fed policy,” said Emily Roland, the co-chief investment strategist of John Hancock Investment Management. “Based on what we’ve seen in terms of this really strong run-in markets, we would consider trimming risk.
A rally in European bonds sent five-year German yields plummeting as much as 16 basis points to 2.48%, putting them on course for the biggest drop since April. US Treasuries yields fell in sympathy, with the 10-year benchmark note shedding 5 basis points.
Germany’s economic activity lost much more momentum than anticipated in June, driven by a slowdown in services and sustained weakness at the country’s factories, according to business surveys by S&P Global. Separate data for France showed its economy probably slumped in the three months through June. The euro fell sharply following the figures.
Concern about the economic outlook was reflected in a rotation into bonds and out of stocks in weekly flow data. Investors yanked $5 billion from global equity funds in the week through Wednesday and added $5.4 billion to bonds.
US stocks face more downside than upside over the next two months as banks and property firms “still have bad recession vibes,” according to the note from Bank of America strategists citing EPFR Global data.
On Thursday the Bank of England unexpectedly raised its benchmark interest rate by a half percentage point, warning it may have to hike again. A rise in UK retail sales in May indicated strength in the economy that the central bank fears may be feeding inflation. The week also saw Norway’s central bank accelerate its hikes and pledge more aggressive tightening, intensifying its response to stubborn inflation and a weak currency.