Outside of the New York Stock Exchange
US equities were jolted by the war in Ukraine, soaring inflation and higher interest rates © AP

US stocks slumped on Thursday, closing out their worst quarter since the start of the coronavirus pandemic, under pressure from the war in Ukraine, high inflation and what is expected to be an aggressive run of interest rate rises.

The benchmark S&P 500 index fell 4.9 per cent over the three months to the end of March, while the tech-heavy Nasdaq Composite declined 9.1 per cent.

It was the weakest quarter for both, and also the first quarter of losses for the S&P 500, since the first quarter of 2020.

“There are a lot of good reasons for a down quarter,” said Lou Brien, a strategist at DRW Trading. “No matter which way you turn, there is more uncertainty. Which way will the war in Ukraine turn? How will the Fed conduct policy?”

Column chart of Quarterly performance, % showing The S&P 500 had its worst quarterly performance in two years

US Treasury bonds have also suffered dramatic losses this quarter: the two-year yield, which moves inversely to price, has risen by 1.58 percentage points, the most since the second quarter of 1984. The benchmark 10-year Treasury yield has increased by 0.82 percentage points, the most since the first quarter of 2021.

The two-year yield, which moves with interest rate expectations, has risen as the Fed increased interest rates by a quarter-point in March for the first time since 2018. Roughly eight more quarter-point cuts are priced in this year as investors bet that the central bank will have to move more rapidly than in previous cycles to tamp down inflation.

A Bloomberg index of total returns from Treasuries had fallen 5.6 per cent this year as of Wednesday’s close, putting it on course to post its weakest quarterly performance since the inception of the index in 1973.

In credit markets, iShares HYG, the largest US high-yield ETF, fell by 5.4 per cent this quarter, its worst performance since the first quarter of 2020. The equivalent investment grade ETF is down 8.7 per cent this quarter, also the worst since 2020.

Asian shares followed the US lower on Friday morning, with Hong Kong’s Hang Seng index falling as much as 2 per cent and Japan’s Topix shedding 1.3 per cent in early trading. Both indices later pared back losses, with the Hang Seng down 0.9 per cent and the Topix 0.1 per cent lower in afternoon trading.

European futures pointed to a mixed start, with contracts for the FTSE 100 down 0.1 per cent and Euro Stoxx 50 futures up 0.1 per cent.

Oil prices weakened on Thursday after the US announced a “historic release” of about 180mn barrels from its Strategic Petroleum Reserve in response to a global supply shortage.

Line chart of year-on-year change in core PCE price index (%) showing Fed’s preferred inflation gauge shoots higher

The Opec+ group of oil-producing nations said it would aim to raise production by 432,000 barrels a day in May, continuing with the monthly plan agreed last year to gradually replace output cut at the start of the pandemic.

Brent crude, the international oil benchmark, settled at $107.91 a barrel, down 4.9 per cent, although oil prices have risen almost 40 per cent in 2022.

The moves came as data showed that the US Federal Reserve’s preferred inflation gauge — the core personal consumption expenditures index which strips out the volatile food and energy sectors — rose 0.4 per cent in February from the previous month.

The figure marked a moderation from January, but took the annual increase in the core PCE index to 5.4 per cent, the quickest pace in about 40 years.

Additional reporting by William Langley in Hong Kong

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