Wall Street rally fizzles as Fed tightening fears spook investors

FILE PHOTO: Raindrops hang on a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar

By Herbert Lash and Huw Jones

NEW YORK/LONDON (Reuters) - A rebound on Wall Street fizzled on Thursday as investors lost conviction that an early rally had legs, with the Nasdaq falling more than 1% and crude oil prices hitting fresh seven-year highs to rekindled fears of inflation and higher interest rates.

Concern that the Federal Reserve will aggressively move to raise rates this year is taking a toll on the market. Investors are anxiously awaiting the U.S. central bank's policy meeting next week for new details on how it will tackle inflation.

Crude prices initially eased before climbing to fresh seven-year highs. The major Wall Street indices sharply pared gains of more than 1% to close about that much lower. The week's big rally in U.S. Treasury yields also showed signs of resuming.

"The rally looked strong on the surface, when you look at prices being higher," said Michael James, managing director of equity trading at Wedbush Securities. "There are more people since the beginning of the year inclined to be sellers on weakness for fear that things keep going further lower."

Strong earnings reports initially helped lift stocks into the black in a broad rally while the major indices in Europe also gained. The broad pan-European FTSEurofirst 300 index closed up 0.51%.

U.S. stocks turned negative late in the session, leading MSCI's all-country world index to fall 0.32%.

On Wall Street, the Dow Jones Industrial Average slid 0.89%, the S&P 500 lost 1.10% and the Nasdaq Composite, in a correction after Wednesday's close, fell 1.30%.

Investors have been concerned about rising rates because they raise borrowing costs and could dent global growth prospects and douse the earnings outlook for companies.

A Reuters poll of economists showed they expect the Fed to tighten monetary policy at a much faster pace than thought a month ago to tame high inflation.

Chair Jerome Powell will stick to the Fed's message of tighter monetary policy next week as inflation has become a hot political issue, said Joe LaVorgna, chief economist for the Americas at Natixis.

"There's no reason for him at the moment to deviate from what clearly has been a more hawkish script. That runs the risk of the markets maybe getting more nervous next week," LaVorgna added.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 1.2 basis points at 1.037%. The yield on 10-year Treasury notes in late trade was down 1.2 basis points at 1.815% after earlier trading higher.

The key catalyst for markets so far in 2022 has been expectations of higher rates as the Fed tightens monetary policy, said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments Inc.

"Given the amount of selling pressure we saw earlier in the week, the market is just consolidating a little bit. Rates don't always move every day in the same direction," Flanagan said.

European Central Bank head Christine Lagarde said euro zone inflation will decrease gradually over the year, adding that the ECB did not need to act as boldly as the Fed because of a different economic situation.

(Graphic on, US tech and bonds: https://fingfx.thomsonreuters.com/gfx/mkt/xmvjobdlepr/US%20tech%20and%20bonds.JPG)

ASIA PERKS UP, UKRAINE EYED

Asian share markets broke a five-day slide, pushing higher on Thursday as China underscored its diverging monetary and economic picture by cutting benchmark mortgage rates.

China's blue-chip CSI300 index rose 0.9% on the day, led by property developers, amid hopes government measures would ease a funding squeeze in the embattled sector, even as another developer warned of default.

Analysts at ING said geopolitical risks, notably the possibility of Russia invading Ukraine, could continue to weigh on global shares, adding to pressure on rising rates concerns.

The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.197% to 95.797, while the yen fell 0.17% at $114.1200. The euro slid 0.27% to $1.1310.

Crude prices rebounded but settled slightly lower. Brent crude settled down $0.06 to $88.38 a barrel. U.S. crude futures slid $0.06 to settle at $86.90 a barrel.

Gold and silver touched fresh two-month highs, lifted by worries surrounding inflation and Russia-Ukraine tensions.

U.S. gold futures settled flat at $1,842.60 an ounce, while silver rose 2.1% to $24.63 an ounce.

(Reporting by Herbert Lash, additional reporting by Huw Jones in London, Andrew Galbraith; Editing by Will Dunham, Bernadette Baum and Cynthia Osterman)

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