US stocks fell on Wednesday dragged lower by tech, while Treasuries slid after an unexpected increase by the Bank of Canada stoked expectations that central banks may not be done raising rates.
Wall Street’s benchmark S&P 500 lost 0.4 per cent, pulled down by tech and communications stocks. The tech-heavy Nasdaq Composite fell 1.3 per cent.
The Russell 2000 index of small-cap companies rose to its highest level since the US regional banking crisis in March, before slipping 0.3 per cent.
The index has risen almost 8 per cent since the end of May, outperforming the S&P 500 and the Nasdaq Composite over the same period, which have both risen 2 per cent.
Francesco Pesole, FX strategist at ING, said: “Small-cap stocks are rising primarily on the back of the recovery in US regional bank stocks, which have re-entered this week the investment-grade bond market for the first time since the start of the banking crisis.”
The KBW regional banking index added 4 per cent on Wednesday, extending its rally from the previous session.
Elsewhere in markets, US Treasury yields rose after Canada’s central bank enacted a surprise interest rate increase because of persistent inflation, which re-accelerated in April. The yield on the two-year note rose slightly to 4.54 per cent, and the yield on 10-year Treasuries increased 0.09 percentage points to 3.79 per cent. Yields rise when prices fall.
“We saw US yields climb on the news that Canada is raising rates and that’s because we’re beginning to see a problematic trend, and that is central banks saying the job is not quite done,” said Frances Donald, chief economist at Manulife Investment Management.
The moves also came as data on Wednesday showed the US trade deficit widened by $14bn in April to $74.6bn, as exports fell 3.6 per cent to $249bn, the most since the beginning of the pandemic. Imports increased 1.5 per cent to $323.6bn.
European indices followed Wall Street lower. The region-wide Stoxx 600 ended the day down 0.2 per cent while France’s CAC 40 fell 0.1 per cent. London’s FTSE 100 traded flat.
Germany’s Dax finished 0.2 per cent lower after data showed industrial production in the eurozone’s largest economy rose 0.3 per cent in April, rebounding from the previous month’s contraction but missing economists’ expectations of a 0.6 per cent rise.
The moves come a day after a European Central Bank survey showed consumers were steadily lowering their expectations for inflation in the eurozone.
Data is being closely watched by traders ahead of an ECB meeting next week in which it is expected to raise its deposit rate from the current level of 3.25 per cent, to ward off lingering inflation.
Annual consumer prices in the 20-country single currency bloc rose 6.1 per cent in the year to May, declining from 7 per cent in April, but investors expect they will remain too high to convince policymakers to stop raising rates.
“While the ECB would welcome the drop in inflation expectations, its job is far from done,” said Mohit Kumar, chief Europe financial economist at Jefferies.
Asian equities were mixed, with Hong Kong’s Hang Seng index adding 0.8 per cent but Japan’s Topix off 1.3 per cent.
China’s CSI 300 lost 0.5 per cent after data showed Chinese exports contracted more than expected in May, in a further dent to the country’s hopes for a strong economic rebound from the Covid-19 pandemic.
Turkey’s lira tumbled as much as 7.6 per cent to a new record low of 23.2 against the dollar as the country eased its long-running battle to defend the currency.
Oil prices rose, with international benchmark Brent crude gaining 0.8 per cent to $76.86 and US marker West Texas Intermediate adding 1 per cent to $72.46.
