Rate speculation weighs on global stocks

Shares in Europe and the US continued their descent on Tuesday June 9th, as market movers are increasingly optimistic of the Federal Reserve raising rates sometime this year. European shares slipped to a three-and-a-half-year low as the global equity selloff deepened. 

The FTSEurofirst 300 index fell by 0.9 per cent, its sixth consecutive session of losses culminating in its lowest level since mid-February. Germany’s DAX was nearly 0.9 per cent in negative territory by the end of the day, and the French CAC 40 was around 0.4 per cent lower.

The UK’s leading share index, the FTSE-100, was more than 0.5 per cent down late on Tuesday.

Over in the US, the Dow Jones Industrial Average index and the S&P 500 edged into negative territory, while the Nasdaq 100 lost more than 0.6 per cent.

Overall market sentiment was dragging stocks lower on mounting concern that the US Federal Reserve might raise interest rates for the first time since 2006. The increasingly hawkish stance of investors was brought about by last Friday’s upbeat labour market report, which moved forward the expectation of a rate hike as early as September this year. 

The Dow now risks closing down for its fourth straight session, which the index hasn’t experienced since late March. After Monday’s decline, the Dow is now negative by 0.3 per cent over the course of 2015 and a whopping three per cent lower than the record closing high of 18,312.39 it set on May 19th. 

Stocks have come under attack by the threat of higher interest rates, which often suppress activity. It’s mainly down to the end of an era of low borrowing costs, which many have cited as the main driver of the current bull market that began in early 2009. 

As rates rise we can also expect profits to fall, which will put pressure on price-to-earnings ratios of businesses. These ratios remain a little overvalued as they now rest slgihtly above their historical average. 

"We have had a pickup in some of the U.S. economic indicators and this development tends to go hand in hand with increasing rate hikes fears," said Robert Parkes, equity strategist at HSBC Global Research.

However, he noted that the long-term trend higher should return after the short-term volatility runs its course. 

"We expect earnings growth to come in significantly ahead of expectations this year and that, combined with the ongoing quantitative easing in Europe, will keep the bull market intact," he explained.

Meanwhile, the dollar failed to gain much of a boost from the speculation of higher interest rates, instead holding steady against a basket of currencies. Dollar demand remains pressured by Monday’s reports of comments from president Barack Obama that expressed concern that the greenback might be overly strong.