US stock rally fades as oil price drop drags down energy companies

A nascent rally in US stocks faded late on Wednesday, with a slide in oil prices weighing on energy shares that dragged down equity indices.

The S&P 500 index gave up early gains to turn negative in the final 30 minutes of trading in New York, ending 0.1 per cent lower for the day. Energy companies including Marathon Oil and ConocoPhillips moved sharply lower as Brent crude oil dropped 2.5 per cent to settle at $111.74 a barrel.

The technology-heavy Nasdaq Composite share index also fell 0.1 per cent and remains nearly 30 per cent lower for the year.

The declines ended a two-day rally for the S&P, which has dropped into a bear market this year on concerns that the Federal Reserve’s push to raise interest rates will cause an economic slowdown.

Jay Powell, the Fed chair, on Wednesday told the US Senate banking committee that “the American economy is very strong and well positioned to handle tighter monetary policy”. But he also warned of further surprises from inflationary trends. He said a recession was “certainly a possibility”.

The Fed last week raised its main interest rate by 0.75 percentage points, the most since 1994, after US consumer price inflation hit a 40-year high in May.

Money markets imply that the Fed will lift its main funds rate to about 3.5 per cent this year, with investors worrying that the combination of rising inflation and higher borrowing costs will threaten corporate profits and economic growth. The annual pace of US consumer price inflation rose to 8.6 per cent last month, after Russia’s invasion of Ukraine helped drive up energy and food prices.

On Thursday, closely watched purchasing managers’ indices produced by S&P Global — which collate executives’ responses to questions on topics such as input costs and order volumes — are expected to show that business activity has slowed in both the US and the eurozone.

“We look for both the manufacturing and services PMIs to provide further signs of weakening,” analysts at TD Securities said in a note to clients.

The yield on the 10-year US Treasury note, which moves inversely to its price and underpins pricing for global debt, fell 0.12 percentage points to 3.16 per cent as demand for the low-risk asset rose. Bond prices rise as yields fall.

The equivalent yield on UK gilts dropped 0.15 percentage points to 2.50 per cent, after data showed British inflation rose to 9.1 per cent last month, increasing fears of a recession.

In Europe, the Stoxx 600 share index fell 0.7 per cent. A FTSE index of Asia-Pacific stocks outside Japan dropped 2 per cent with Tokyo’s Topix closing 0.2 per cent lower.

Japan’s yen tumbled to a 24-year low of ¥136.71 against the dollar as traders bet on the Bank of Japan maintaining ultra-low borrowing costs, in defiance of the global trend.

Additional reporting by Harriet Clarfelt

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