European stocks and US futures slip after week-long rally

European stocks and US futures slipped on Friday at the end of a week in which financial markets rallied on signs that interest rates are close to peaking on both sides of the Atlantic.

Leading central banks this week lifted interest rates to their highest levels since the global financial crisis, yet investors rushed into equities and government bonds after officials hinted that the current cycle of monetary tightening may be nearing its end.

US equities rose on Thursday to their highest level since August, although disappointing fourth-quarter results from big US tech groups after the closing bell undercut some of the optimism.

Contracts tracking Wall Street’s blue-chip S&P 500 fell 0.8 per cent ahead of the New York open while those tracking the tech-heavy Nasdaq 100 dropped 2 per cent. Amazon, Alphabet and Apple fell 5 per cent, 4 per cent and 3 per cent respectively in pre-market trading after they reported their earnings for the final three months of 2022 late on Thursday.

Europe’s Stoxx 600 slipped 0.2 per cent on Friday morning, with Germany’s Dax falling 0.7 per cent, although London’s FTSE 100 rose 0.2 per cent.

The moves come after the Bank of England and European Central Bank on Thursday lifted rates by 0.5 percentage points, and with the Federal Reserve having increased its main policy rate by a quarter of a percentage point on Wednesday.

Yet none of the central banks were as hawkish on inflation as investors had expected, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. Markets expect rate cuts later this year despite officials’ warnings that borrowing costs will remain at historically high levels until inflation has been tamed.

“It was much easier for central banks to shape market expectations in the early stage of the tightening cycle,” Ducrozet said. “It looks much more difficult for them to push back against rate cuts expectations on the way down.”

European government bonds came under pressure after rallying hard in the previous session. The 10-year German Bund yield rose 0.08 percentage points to 2.14 per cent having dropped 0.2 percentage points on Thursday. Yields on riskier Italian 10-year bonds also rebounded slightly, rising 0.1 percentage points to 3.90 per cent after tumbling 0.4 percentage points after the ECB’s policy announcement.

Elsewhere in equity markets, Hong Kong’s Hang Seng index declined 1.3 per cent and China’s CSI 300 fell 0.9 per cent. Japan’s Topix added 0.3 per cent.