Global markets firmer as Fed tones down rates talk

World shares edged higher and the bond market calmed on Wednesday after reassurances from US Federal Reserve Chair Jerome Powell that the world’s main central bank isn’t rushing to hike rates, but European stocks struggled to gain momentum.

The market is still feeling the after-effects of the Fed’s surprise projection last week for rate hikes as soon as 2023, which knocked stocks, boosted the dollar and prompted the US bond yield curve to flatten.

Powell sought to reassure investors on Tuesday, saying that the central bank will watch a broad set of job market data to assess the economic recovery from Covid-19, rather than rush to raise rates on the basis of fear of inflation.

The MSCI world equity index, which tracks shares in 49 countries, was up 0.1% 7.53am GMT, having recovered from the one-month low it hit in the aftermath of the Fed’s meeting.

But MSCI’s main European Index struggled to gain momentum, and was down 0.3%. The pan-European Stoxx 600 was 0.2% lower on the day, but up about 1.6% from the lows it recorded on Monday .

“The market’s still digesting the Fed news,” said Mo Kazmi, a portfolio manager and macro strategist at UBP.

“I think a lot of that move was exacerbated by stretched positioning and now what we’re seeing is perhaps reflation trades being put back on and the market normalising to some extent, realising that for now it’s just a subtle shift from the Fed.”

Powell’s comments pushed the yield on US Treasuries lower and put the brakes on a rising dollar. The yield on the 10-year benchmark bond  was at 1.4767% at 8.01am GMT .

The dollar slipped as European markets opened, but it remains near multimonth highs after the Fed’s change in tone cleared out a heap of short positions. The euro was steady against the greenback at $1.19385.

“We continue to expect inflation to moderate as base effects and pandemic-related issues fade, while global vaccination efforts and higher earnings support a positive outlook for equities,” UBS strategists wrote in a note to clients.

European growth

Early PMI data showed that eurozone business growth accelerated at its fastest pace in 15 years in June as the easing of more lockdown measures and the unleashing of pent-up demand drove a boom in the bloc’s dominant services industry.

Growth in Germany’s private sector was also lifted to its highest level in more than a decade in June, according to the survey. In France, business activity edged higher, though not as much as expected.

UBP’s Kazmi said he is positioned for higher yields in Europe, as it overtakes the US in terms of vaccinations, lockdown easing and economic recovery from Covid-19.

“It will be interesting to see if the German bund can follow the US rate move with yields moving higher in Europe — it is something that we think could happen,” he said. “The fact that the Fed has moved more hawkishly will allow the ECB [European Central Bank] to be more comfortable perhaps in moving more hawkish, or less dovish.”

Germany’s benchmark bund yield was steady at -0.168% at 8.12am GMT.

Oil prices rose after industry data showed US crude inventories fell more than expected.

Gold edged higher, recovering after it dropped to its lowest since late April after the Fed last week.

Elsewhere, bitcoin was about 5% higher, above the $34,000 mark. The cryptocurrency dropped to as low as $28,600 on Tuesday — its lowest since January. Ether was trading at about $2,000.