LONDON - World stocks were set to snap a record 15-month long winning streak on Wednesday, tumbling another quarter percent after new Fed boss Jerome Powell's comments suggested the possibility of four U.S. interest rate rises this year rather than three.
Barely recovered from an early-February sell-off, equity sentiment has been shaken by Powell and by data showing China's manufacturing sector slowing to its weakest in over 1-1/2 years and Japanese industrial output down the most since March 2011.
Equity futures signaled Wall Street would open flat after declines of more than 1 per cent on Tuesday when the U.S. Federal Reserve chief delivered his debut testimony to Congress.
Powell had struck a mildly hawkish note, noting inflation had risen since December and vowing to prevent the economy from overheating..
But that was enough for traders to add bets on the Fed squeezing in another rate rise this year, with futures now pricing a one-in-three chance of a fourth hike.
U.S. 10-year yields retreated after rising on Tuesday toward four-year highs though the dollar hovered near three week peaks and is set for a monthly rise against a basket of currencies after three months of declines.
On equities, MSCI's all-country index fell 0.3 per cent, capping a turbulent month that saw trillions of dollars wiped off share markets during an early-February volatility explosion.
"After yesterday, the market is contemplating that we will probably get four rate hikes this year and you have seen the reaction in equities and Treasuries," said Peter Garnry, head of global equities at Saxo Bank in Stockholm.
Powell also said financial conditions remained accommodative despite higher volatility. Wall Street's main volatility gauge, the VIX, closed Tuesday with its biggest daily rise since early-February, easing only slightly on Wednesday.
"The Fed 'put' for equities is likely still there but it's weaker," Garnry said, referring to investors' assumption that the central bank would intervene to prop up equity markets.
"The recent vol hiccup has changed the volatility outlook to a higher level."
European shares lost 0.5 per cent, down 3.8 per cent in February, their first monthly loss since November.
Emerging equities fell 1 per cent, pulled down by a 1.4 per cent tumble in Hong Kong and set for their biggest monthly loss since November 2016, while Japan's Nikkei lost 1.4 per cent and snapped a five-month run of gains.
A fall in new orders for U.S.-made capital goods for the second month in a row, plus the dismal Chinese and Japanese numbers, are also making investors fret about a possible setback to growth, especially in China, the world's No. 2 economy.
Not everyone is bearish however.
"Equities and risk assets may wobble as yields rise, but stronger growth should be good for corporate earnings and offset the impact from the expected increase in central bank policy rates," the world's biggest asset manager BlackRock said.
Unicredit analysts agreed. They said that while markets might price in higher U.S. interest rates, these would likely remain modest and also hinge on economic data staying robust.
"As long as both of these conditions are met, we do not believe that (Powell's) testimony threatens to derail risk appetite, at least not in a sustained way," they told clients.
Markets are ending February pretty much as they began it -- on a sour note, spooked by concerns U.S. inflation would pick up and that central banks could end up tightening policy further and faster than originally anticipated.
The MSCI index remains more than 5 per cent below record highs hit at the end of January.
Equity gains from here may be hindered by bond markets, with U.S. 10-year yields close to the psychologically key 3 per cent level and up 17 basis points this month.
UBS Wealth Management predicted that U.S. GDP data later in the day would reinforce "the picture of an economy performing at or above trend, justifying four rate hikes this year".
But the Bank of Japan and European Central Bank could act as counterweights -- euro zone inflation for February at 1.2 per cent showed on Wednesday that the ECB's near-2-per cent target remains years away.
German 10-year bond yields meanwhile are set for their first monthly fall since October, down 2.5 basis points in February, while Japanese yields are just off two-month lows hit earlier this week