Global equities slip as investors expect further monetary tightening

Global equity markets generally declined on Tuesday amid heightened fears that central banks will keep interest rates high for an extended period due to stubborn inflation.

The MSCI All-World index, which tracks shares in 47 developed and emerging markets, tumbled by 0.2 percent. The index posted a monthly decline of around three percent, significantly erasing the gain it earned in January.

MSCI's All Countries Asia-Pacific, which excludes Japan, also slid by 0.39 percent to 623.98.

In Europe, the STOXX 600 index fell by 0.3 percent. However, despite the decline, the index ended February with a 1.74 percent gain.

On Wall Street, all three benchmark indexes concluded the trading session lower. The Dow Jones closed at 32,656.7 or lost 0.71 percent. The S&P 500 ended at 3,970.15 or fell by 0.3 percent. Meanwhile, the Nasdaq Composite concluded the session at 11,455.54 — a 0.1 percent drop.

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Economists explained that the market is less optimistic about central banks loosening their monetary policies in the near future due to recent economic data. It was different from last January when equity markets around the world rallied with the expectation that central banks would soon conduct policy pivots.

"Markets will need to adjust to the Federal Reserve's message that interest rates may need to go to higher levels and stay there for a longer period of time."

Douglas Beath, Head of the Asset Allocation Working Group at Wells Fargo Investment Institute

Douglas Beath, head of the asset allocation working group at Wells Fargo Investment Institute, said equity markets would likely be even more volatile in the near term as investors projected further rate hikes.

The market forecasts that the U.S. interest rates will peak at around 5.4 percent by September. As the current federal funds rate ranges from 4.5 to 4.75 percent, the Federal Reserve will likely do up to three more rate hikes.

Some economists suggest a 25-basis-point rate hike in March's Federal Open Market Committee (FOMC) meeting, while others predict a bigger increase of 50 basis points. The committee last raised the interest rate by a quarter of a percentage point.

Previously, analysts predicted that the Fed would cut interest rates by the end of this year. However, they now expect the U.S. central bank to only start cutting rates in 2024 to bring inflation closer to the two percent target.

The market also predicts that the European Central Bank (ECB) will raise its benchmark rate to an all-time high of four percent. Meanwhile, the interest rate in the U.K. is expected to peak at 4.5 percent this year.

The Conference Board reported that U.S. consumer confidence fell in February after falling in the previous month as well. The new data followed core capital goods orders data that showed an annual increase of 5.3 percent in January, the index's biggest gain in five months.

Meanwhile, France's European Union-harmonized consumer prices in February surged to 7.2 percent. Spain's E.U.-harmonized year-over-year inflation in February also rose to 6.1 percent from 5.9 percent in January.

Updates on other markets

The U.S. two-year Treasury yield, which is sensitive to interest rate expectations, went up by 2.5 basis points on Tuesday. The two-year notes yield rose by almost five percent in February, its largest monthly increase for February in over four decades, per financial market data provider Refinitiv.

Meanwhile, the U.S. 10-year bond yield rose by one basis point to 3.932 percent. The yield posted a monthly increase of 50 basis points in February, its largest monthly gain since September 2022.

The U.S. dollar index, DXY, went up by 0.24 percent. It posted a monthly gain of 2.76 percent in February, ending its four-month losing streak.

The U.K. sterling went down 0.3 percent to $1.202 after its rally on Monday. The euro also tumbled by 0.3 percent to trade at $1.057.

Meanwhile, oil prices increased by more than 1.5 percent. U.S. crude oil rose by 1.68 percent to $76.95 per barrel, while Brent surged 1.72 percent to $83.87. Gold price also rose by 0.5 percent to $1,827 per ounce.