By Amanda Cooper
LONDON (Reuters) -Stocks slid on Wednesday, echoing losses on Wall Street overnight, while the dollar rose broadly, after Federal Reserve Chair Jerome Powell fell short of confirming investors’ expectations that U.S. interest rates will decline sharply in coming months.
In Europe, defence stocks – one of the star-performing sectors this year – jumped after U.S. President Donald Trump said he believed Ukraine could retake all its land occupied by Russia, marking a sudden shift in rhetoric in Kyiv’s favour.
“After seeing the Economic trouble (the war) is causing Russia, I think Ukraine, with the support of the European Union, is in a position to fight and WIN all of Ukraine back in its original form,” he said in a social media post on Tuesday, although there was no sign of any actual change in U.S. policy.
Defence stocks such as Rheinmetall, Hensoldt and SAAB rose between 2-4.8%, although losses in financials kept the STOXX 600 down around 0.4% on the day.
In a sometimes-meandering speech to the U.N. General Assembly, in which he rejected moves by allies to recognise a Palestinian state, Trump chastised Western nations for their approach to climate change and immigration, telling leaders “your countries are going to hell.”
While geopolitics have been a large driver for global markets this year, the focus for investors on Wednesday was firmly trained on the outlook for the U.S. economy and the likely path of U.S. interest rates.
The dollar rose broadly, leaving the euro, pound and yen in negative territory, pushing up the U.S. currency against a basket of six others by 0.35% on the day.
Powell, in remarks on Tuesday, largely stuck to the language used last week when the central bank cut its benchmark rate a quarter of a percentage point, to stress the need for policymakers to balance the competing risks of high inflation and a weaker jobs market in coming monetary policy decisions.
Given that traders are almost fully pricing in a rate cut in October, Powell offered little in the way of new direction for markets.
“There was a clear pivot at the last meeting which set the direction, but the pace (of cuts) is something we’ll have to see,” Daiwa Capital economist Chris Scicluna said.
“All markets, if you’re looking on the fixed-income side or the equity side, are taking comfort from the expectation that the Fed will be easing for the remainder of this year and again next year and take them basically moving from a restrictive stance to a neutral stance,” he said.
Traders have ramped up bets on further U.S. rate cuts, with Fed funds futures implying a 91.9% chance of a rate cut at the central bank’s October meeting, up from a 89.8% probability on Tuesday, according to the CME Group’s FedWatch tool.
Longer-dated U.S. government bonds attracted buyers, which pushed down the yield on 30-year Treasury bonds by 2.1 basis points on the day to 4.717%, while the benchmark 10-year note eased 1.4 bps to 4.106% and the rate-sensitive two-year yield held steady at 3.565%.
U.S. economic data released on Tuesday stoked growth concerns, with purchasing managers’ index (PMI) data from S&P Global showing business activity slowed for a second straight month in September.
“The S&P PMIs were softer in the September preliminary release, but both remain in expansion and are within the range of the last few months,” Citi analysts wrote in a research note. But they pointed to more weakness in the details than implied in the headline numbers.
“The composite output prices index fell to the lowest level since April with anecdotes mentioning that firms are having difficulty passing on higher costs to consumers due to weak demand and more competition,” the analysts said.
In commodities, gold shrugged off the drag from a stronger dollar to rise 0.25% on the day $3,772 an ounce, just below Tuesday’s record high of $3,790.
In oil markets, Brent crude rose 0.3% to $67.86 a barrel, after a deal to resume exports from Iraq’s Kurdistan stalled, pacifying some investor concerns that the restart might exacerbate worries about global oversupply.
(Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Jamie Freed, Jacqueline Wong , Sam Holmes and Sharon Singleton)
