European stocks stabilized on Tuesday after a strong overnight sell-off on Wall Street, when traders took warmer-than-expected U.S. services data as a signal for further interest rate hikes from the Federal Reserve.
The regional Stoxx Europe 600 and London’s FTSE 100 both fell 0.1% in early trading.
Contracts that track Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both rose 0.2% after a strong selloff in US stocks in the previous session.
The S&P 500 and Nasdaq Composite suffered their biggest daily declines since the day after the U.S. midterm elections on Monday after a report by the Institute for Supply Management showed its index, which tracks economic activity in the services sector, rose for the 30th month in a row in November, rising to 56.5 from 54.4 in October.
The surprisingly high figure was interpreted by investors as a sign that the Fed may still have to hold the world’s most important interest rate longer in an attempt to cool the US economy. A cycle of rate hikes took the fed funds rate to a target range of 3.75% to 4% from zero at the start of the year.
“The latest ISM data underscores the clear divergences in the US economy as spending continues to shift from goods to services,” said Mark Haefele, global chief investment officer of UBS’s wealth management group, pointing to the contraction in the US manufacturing sector in November.
“While inflation has likely peaked, pricing pressures in the services sector are slow to ease,” Haefele added, noting that “good economic news” reduced the chances of a so-called Fed pivot around inflation expectations.
Fed Chairman Jay Powell said in a speech last week that although price growth showed signs of slowing in October, “by any measure, inflation remains far too high.”
US government bonds rallied on Tuesday after selling off sharply following the ISM release. The interest rate sensitive two-year Treasury yield fell 0.02 percentage points to 4.37%. The yield on the benchmark 10-year note also fell 0.02 percentage point to 3.58%. Yields fall as prices rise.
In Asia, meanwhile, Hong Kong’s Hang Seng index lost 0.4%, although the index has risen more than 17% since its low in late October. China’s CSI index of stocks listed in Shanghai and Shenzhen gained 0.5% as zero Covid policies were eased across the country.