US shares fall as concerns grow over economic outlook

US stocks slipped on Wednesday after a fresh batch of bank earnings disappointed investors, pushing fears of a potential recession to the fore.

Wall Street’s benchmark S&P 500 slipped 0.2 per cent in morning trade in New York, with basic materials, energy and technology stocks among the worst performers. The tech-heavy Nasdaq Composite, which is up 15 per cent this year, lost 0.1 per cent.

Europe’s region-wide Stoxx 600 fell 0.1 per cent while Germany’s Dax rose by the same amount.

Sentiment in the US was hit after Morgan Stanley’s first-quarter results showed a drop in earnings following a slowdown in dealmaking, sending its shares 0.6 per cent lower. Citizens Financial Group lost 2.5 per cent after a 5 per cent fall in deposits in the first three months of the year. Tesla is due to report its earnings later in the day. Those moves came after Goldman Sachs on Tuesday said its first-quarter profits slumped 18 per cent. The KBW Nasdaq Bank index was up 0.2 per cent.

US equity markets have ticked higher so far this year despite the failure of three midsized lenders in March, though some doubt how much higher stocks have left to rise.

“Despite the moves over the past month, it is almost unanimous among client conversations that they remain bearish,” said analysts at JPMorgan. Bank of America’s latest fund managers’ survey meanwhile showed that fear of a credit crunch means investments in equities relative to bonds have fallen to their lowest level since the great financial crisis.

US government debt sold off, with the yield on two-year Treasuries up 0.06 percentage points to 4.26 per cent, its highest level in a month, and the yield on 10-year debt also up 0.06 percentage points to 3.63 per cent.

Elsewhere, London’s FTSE 100 lost 0.1 per cent after annual UK consumer price growth last month eased less than expected to 10.1 per cent, down from 10.4 per cent in February. Economists had expected a decline to 9.8 per cent.

Core inflation was unchanged at 6.2 per cent but was kept high by further sharp prices for food, recreation and culture. The pound traded 0.1 per cent higher against the dollar at $1.243.

Paul Dales, chief UK economist at Capital Economics, said the March figures meant “it’s become even more likely” the Bank of England would raise interest rates to 4.5 per cent in May. “This release even makes us wonder if that won’t be the peak.”

UK government bonds sold off on Wednesday morning, with yields on interest rate-sensitive two-year gilts up 0.13 percentage points to 3.81 per cent — the highest level since late February. Futures markets now expect UK interest rates to peak at 5 per cent in November, having priced in a peak of 4.78 per cent in September before March’s inflation data.

Line chart of UK 2-year gilt yield (%) showing UK government bonds sell off on inflation data

“It’s now clear the UK has an inflation problem that is worse and more persistent than in Europe and the US”, said Ed Monk, associate director at investment management company Fidelity International.

Asian stocks retreated, with Hong Kong’s Hang Seng index down 1.4 per cent and China’s CSI 300 index losing 0.9 per cent, down from its highest level since early February.

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