Fed’s Powell sends world stocks reeling to 5-day low to end turbulent February

LONDON (Reuters): World stocks were set to snap a record 15-month long winning streak on Wednesday, tumbling another quarter percentage after new Fed boss Jerome Powell’s comments suggested the possibility of four U.S. interest rate rises this year rather than three.

Barely recovered after an early-February sell-off, equity sentiment has been shaken by Powell and by data showing China’s manufacturing sector slowing to its weakest in over 1-1/2 years and Japanese industrial output down the most since March 2011.

The U.S. Federal Reserve chief, in his debut testimony to Congress on Wednesday, struck a mildly hawkish note, noting inflation had risen since December and vowing to prevent the economy from overheating.

That was enough for traders to add bets on the Fed squeezing in another rate rise this year, with futures tied to target policy rates now pricing a one-in-three chance of a fourth hike.

With U.S. 10-year yields again approaching recent four-year highs, New York shares closed 1% lower on Tuesday. MSCI’s all-country index fell 0.8% on Tuesday and tumbled another 0.3% on Wednesday.

Wall Street’s main volatility gauge, the VIX, opened a touch lower, after seeing its biggest daily rise since early-February.

But a fall in new orders for U.S.-made capital goods for the second month in a row, plus the dismal Chinese and Japanese numbers, have made investors fret about a possible setback to growth, especially in China, the world’s No. 2 economy.

“(Powell’s) more hawkish tone and disappointing durable goods data explains the sell-off in stocks. China PMI data was also a bit disappointing overnight,” said Benjamin Schroeder, a strategist at ING Bank.

Emerging equities fell 1%, pulled down by a 1.4% tumble in Hong Kong and on track for their biggest monthly loss since November 2016, while Japan’s Nikkei lost 1.4% and snapped a five-month run of gains.

European shares lost around 0.3% and have shed 3.6% in February, their first monthly loss since November. Equity futures suggested a flat to slightly firmer session for Wall Street.

Not everyone is bearish however.

“Equities and risk assets may wobble as yields rise, but stronger growth should be good for corporate earnings and offset the impact from the expected increase in central bank policy rates,” the world’s biggest asset manager BlackRock said.

Analysts at Unicredit agreed. They said that while markets might price in higher U.S. interest rates, these would likely remain modest and also hinge on economic data staying robust.

“As long as both of these conditions are met, we do not believe that (Powell’s) testimony threatens to derail risk appetite, at least not in a sustained way,” they told clients.

Treasuries

Markets are ending February pretty much as they began it – on a sour note, spooked by concerns U.S. inflation would pick up and that central banks could end up tightening policy further and faster than originally anticipated.

Those fears were behind the selloff that wiped trillions of dollars off world stocks in less than a week early in February. The MSCI index remains more than 5% below record highs hit at the end of January.

Their path higher is likely to be hindered by bond markets, with U.S. 10-year yields close to the psychologically key 3% level and up 17 basis points this month.

Headwinds also could come from the dollar, which is set for a monthly rise against a basket of currencies following three months of declines and which touched three-week peaks after Powell’s comments.