Commodity prices soar and bond yields settle before Powell’s speech

Milan/Singapore — Optimism about the economic outlook pushed commodity prices to new highs on Tuesday, helping stocks steady as expectations of a dovish testimony by US Federal Reserve chair Jerome Powell calmed down bond yields.

The MSCI world equity benchmark was flat near two week lows by 9.19am GMT, helped by gains in commodity-heavy equity indices in Asia and a rally in European travel stocks on the prospect of easing social restrictions.

UK Prime Minister Boris Johnson set out a phased plan on Monday to end a Covid-19 lockdown in the world’s sixth largest economy.

World stocks had been weighed down in recent sessions by a rapid surge in global bond yields, which fuelled expectations that central banks could eventually turn less accommodative in a bid to tame inflation. Tech stocks were among the hardest hit.

But the sell-off in the bond market eased after European Central Bank chief Christine Lagarde said on Monday the central bank was “closely monitoring” rising borrowing costs.

Investors now expect Powell to be equally reassuring when he testifies before Congress at 3pm GMT.

“If there were already any expectations that Powell could try to calm down rates, then [Lagarde’s remarks] have just further cemented them,” said Giuseppe Sersale, strategist and fund manager at Anthilia in Milan.

However, tech stocks and rate-sensitive sectors such as utilities in Europe fell, offsetting stronger travel and commodity stocks and pushing down the regional benchmark by 0.6%. In Asia, the rally in commodities lifted Australia’s S&P/ASX 200 0.9%, while tech-laden South Korea’s Kospi lost 0.3%. Japanese markets were shut for a public holiday.

Nasdaq futures were down 0.6% at three-week lows after high-growth stocks such as Apple, Microsoft and Tesla dragged the index down 2.5% on Monday, while S&P 500 futures edged 0.1% lower.

Bond yields have risen sharply in February as prospects of more US fiscal stimulus boosted hopes for a faster economic recovery globally. However, that is also fuelling inflation worries, prompting investors to sell growth stocks that have rallied in recent months.

“Real US interest rates are now in positive territory, which has created some concern around the consequences for equities markets,” Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management said in a report.

US 10-year Treasury yields edged up to 1.374% but remained below the one-year high of 1.394% hit on Monday.

Germany’s 10-year Bund yields also rose to -0.309% but were below the eight-month high of -0.278% hit in the previous session.

Commodity prices strengthened again.

Oil prices jumped more than $1, underpinned by optimism over Covid-19 vaccine rollouts and lower output as US supplies were slow to return after a deep freeze in Texas shut in crude production last week.

Brent crude was last up 0.9% at $66.18 a barrel after earlier hitting a 13-month high of $66.79, while US crude rose 1.2% to $62.45 a barrel.

“Oil has been caught up in the broader commodities move higher, with a weaker dollar proving constructive for the complex,” ING strategists led by Warren Patterson said in a note.

“Meanwhile, there is also a growing view that the oil market is looking increasingly tight over the remainder of the year”.

Copper prices, meanwhile, hit a nine-and-a-half-year high as tight supply and solid demand from top consumer China boosted sentiment.

In currency markets, the dollar briefly dropped to its lowest since January 13 ahead of Powell’s testimony, while commodity-linked currencies hovered near multiyear highs.

The dollar index was up 0.1% at 90.143, with the euro flat at $1.2151.

Reuters