European shares struggle for direction after Wall Street rally overnight

European equities were muted on Wednesday, as a bounce for global stock markets failed to carry over into a second trading session.

The regional Stoxx 600 share index struggled for direction in early dealings, while London’s FTSE 100 dipped 0.1 per cent. In Asia, Hong Kong’s Hang Seng index slipped 0.1 per cent, while Tokyo’s Nikkei 225 closed 0.9 per cent higher.

The S&P 500 index of blue-chip US shares rose 2 per cent on Tuesday as traders moved back into riskier assets after the worst streak of weekly losses for equities since 2008. The gains also followed stronger than expected retail sales figures, which suggested consumers were still spending even though inflation remained at a four-decade high.

But some analysts cautioned that this was a bear market rally, where long downtrends in equity markets are punctuated by short bursts of relief, as investors remained nervous about rising interest rates compounding a global economic slowdown.

“Investor sentiment was supported by news of stronger than expected US retail sales,” said Johan Javeus, chief strategist at Nordic Bank SEB. But, he added, “while many have speculated in a bear market rally for equities following sharp declines over the past weeks, it is still early days”.

The S&P, which leads other global stock markets, last week skirted a bear market, defined as a 20 per cent decline from a recent peak. The FTSE All World index of developed and emerging market shares is also trading about 15 per cent below its level at the start of the year.

The dour mood in markets has built up as major central banks, which pinned borrowing costs close to zero and bought government bonds at unprecedented rates at the start of the coronavirus pandemic, started to reverse their supportive policies.

On Tuesday, US Federal Reserve chair Jay Powell said the world’s most influential interest rate setter would continue raising borrowing costs until it saw “clear and convincing” evidence that US inflation, running above 8 per cent, was coming down.

The Fed has raised interest rates by 0.75 of a percentage point since March and signalled further half-point rises at its next two monetary policy meetings. It will also start shrinking its balance sheet, which swelled to $9tn after it launched unlimited purchases of Treasuries and mortgage-backed bonds in March 2020, from next month.

After financial markets had benefited from “huge liquidity support” from central banks, “the buyer of last resort is going out the door”, said Neil Birrell, chief investment officer at Premier Miton Investors.

“Market sentiment is really fickle and we do get days of relief,” he added. “But I don’t get the feeling there’s any real momentum behind any of these rallies.”

Futures trading implied the S&P would fall 0.5 per cent in early New York dealings and the technology-focused Nasdaq 100 would fall 0.6 per cent.

Government bond markets steadied on Wednesday after coming under selling pressure in the previous session, as traders moved back into stocks.

The yield on the 10-year Treasury note, which underpins global debt pricing, was flat at 2.97 per cent. Germany’s equivalent Bund yield was also steady at 1.04 per cent.

Sterling fell 0.5 per cent against the dollar, to $1.24, after a rally on Tuesday driven by improved risk sentiment. The euro fell 0.3 per cent to $1.05.

Brent crude, the oil benchmark, rose 0.5 per cent to $112.48 a barrel.