Bonds extend losses, stocks waver on hawkish Fed: markets wrap

A global bond selloff deepened on Wednesday and stocks wavered on the prospect of a swift reduction in the Federal Reserve’s debt holdings as part of a stepped-up campaign of monetary tightening to tackle high inflation.

The 10-year Treasury yield rose above 2.6%, taking it back into the ranges traded in 2018 and 2019, after jumping the most on Tuesday since the Covid crash in March 2020. Bonds in Australia and New Zealand also tumbled, while sovereign debt across Europe retreated. A gauge of the dollar’s strength was near a three-week peak.

The Stoxx Europe 600 index dipped and US index futures were little changed following a drop in Wall Street shares led by the technology sector. An Asia-Pacific share index fell over 1%, dragged down by Japan and Hong Kong as the latter reopened after a holiday.

Fed Governor Lael Brainard said Tuesday curbing inflation is “paramount,” adding the central bank may start trimming its balance sheet rapidly as soon as May. Investors fear that a more restrictive US central bank could end up tipping the world’s largest economy into a downturn, or even a recession. The virus resurgence in Asia and the war in Ukraine are also clouding the outlook for prices and growth.

“What makes the comments overnight so significant is that Ms Brainard is typically one of the most dovish of the FOMC members,” Jeffrey Halley, a senior market analyst at Oanda, wrote in note. “If she has swung into the uber-hawk camp, then markets need to take notice and that they did. The QE honeypot looks close to being empty now.”

Oil was steady at about $102 a barrel. Worries remain that Russia’s growing isolation over the war in Ukraine may further disrupt commodity flows. Fresh sanctions on Russia are expected, including a US ban on investment in the country and a European Union proscription on coal imports.

Brainard’s comments put the spotlight even more firmly on the Fed meeting minutes due later Wednesday, which are expected to provide clues about the pace of both interest-rate hikes and so-called quantitative tightening, the process of shrinking the central bank’s bond holdings.

“The key risk for Wall Street-correlated world stock markets remains the Federal Reserve tightening cycle,” Christopher Wood, global head of equity strategy at Jefferies LLC, wrote in a note. Quantitative tightening alongside rate rises may have a more rapid impact given current debt levels, he said.

Markets signal a half-point Fed rate increase is on the cards at next month’s policy meeting. At the same time, price pressures show little sign of abating as war stokes already elevated raw-material costs.

“The Ukraine crisis is nowhere near to being resolved,” Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets LLC, said on Bloomberg Television. “And then we’re heading into earnings season. Volatility levels are probably too low and will start to pick up.”

Meanwhile, the latest data from China indicated that activity in its services industry contracted in March amid mobility curbs to stem a Covid outbreak.

Key events to watch this week:

• Federal Reserve minutes Wednesday
• EIA crude oil inventory report Wednesday
• Philadelphia Fed President Patrick Harker speaks Wednesday
• St. Louis Fed’s James Bullard, Atlanta Fed’s Raphael Bostic, Chicago Fed’s Charles Evans speak at separate events Thursday
• Reserve Bank of India rate decision Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.1% as of 8:19 a.m. London time
• Futures on the S&P 500 were little changed
• Futures on the Nasdaq 100 were little changed
• Futures on the Dow Jones Industrial Average were little changed
• The MSCI Asia Pacific Index fell 1.3%
• The MSCI Emerging Markets Index fell 0.9%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0897
• The Japanese yen fell 0.3% to 123.91 per dollar
• The offshore yuan was little changed at 6.3714 per dollar
• The British pound was little changed at $1.3071

Bonds

• The yield on 10-year Treasuries advanced six basis points to 2.61%
• Germany’s 10-year yield advanced two basis points to 0.64%
• Britain’s 10-year yield advanced two basis points to 1.67%

Commodities

• Brent crude rose 0.2% to $106.89 a barrel
• Spot gold fell 0.2% to $1,918.89 an ounce