Dollar Rallies, Stocks Decline on Fed Hike Bets: Markets Wrap

(Bloomberg) — The dollar rallied and stocks dropped alongside Wall Street equity futures with expectations of steeper US rate hikes growing after comments by two Federal Reserve officials.

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The Bloomberg dollar gauge rose as much as 0.5%, erasing its losses for the year, while benchmark Treasury yields climbed for a fourth day. Yields on two-year and 10-year Treasuries are both at their highs for 2023. Data on Thursday showed that US producer prices rebounded in January by the most since June.

Europe’s Stoxx 600 index fell 0.8%, a day after climbing to the highest level in a year. Contracts for both the S&P 500 and Nasdaq 100 retreated after the underlying indexes sank more than 1% on Thursday. An Asian stock benchmark was set for a third straight weekly slide, the worst such run of losses since October.

Federal Reserve Bank of Cleveland President Loretta Mester said she had seen a “compelling economic case” for rolling out another 50 basis-point hike, and St. Louis President James Bullard said he would not rule out supporting a half-percentage-point increase at the March meeting. While Mester and Bullard participate in deliberations, they do not vote on monetary policy decisions this year.

The market has been “a little bit too sanguine” so far this year concerning any imminent Fed pivot, according to Helen Zhu, chief investment officer at Hong Kong-based Nan Fung Trinity.

“We don’t necessarily think there’s going to be a 50-basis-point rate hike at this next Fed meeting, but we do think that the expectations for a lot of cuts in the second half of this year are probably overdone,” Zhu said on Bloomberg Television.

Investors have been upping their bets on how far the Fed will raise rates this tightening cycle. They now see the federal funds rate climbing past 5.2% in July, according to trading in the US money markets. That compares with a perceived peak rate of 4.9% just two weeks ago.

For Commerzbank AG, the dollar still has room to run. “As long as inflation is not coming down, the US dollar will benefit,” Esther Reichelt, a foreign exchange strategist at the bank, said on Bloomberg Television. “It’s not what we are seeing, but that’s definitely the risk,” she said.

In China, the central bank added the biggest amount of cash on record into the banking system to avoid a liquidity squeeze. Earlier, the government was said to be selecting regulatory veterans known for their strict campaigns against financial wrongdoing as the new heads of the country’s banking and securities watchdogs.

China Renaissance Holdings Ltd. fell as much as 50% in Hong Kong, the most ever, after saying that it was unable to contact Bao Fan, chairman, chief executive officer and controlling shareholder of the Chinese investment bank.

Most of the dollar bonds issued by Indian conglomerate Adani Group exited distressed territory after it said it will address upcoming maturities of the debt. The move is seen as the group’s latest effort to boost investor sentiment after a rout sparked by a US short-seller report.

Bitcoin retreated after three days of gains that were fueled by easing fears of a US regulatory crackdown.

In commodities, oil headed for a weekly drop as rising US inventories and the prospect of further tightening by the Federal Reserve eclipsed the lift from more signs that Chinese energy demand is improving. Gold fell.

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 fell 0.9% as of 8:09 a.m. London time
S&P 500 futures fell 0.6%
Nasdaq 100 futures fell 0.8%
Futures on the Dow Jones Industrial Average fell 0.5%
The MSCI Asia Pacific Index fell 1.3%
The MSCI Emerging Markets Index fell 1.1%

Currencies

The Bloomberg Dollar Spot Index rose 0.5%
The euro fell 0.4% to $1.0635
The Japanese yen fell 0.8% to 134.95 per dollar
The offshore yuan fell 0.3% to 6.8909 per dollar
The British pound fell 0.6% to $1.1923

Cryptocurrencies

Bitcoin fell 3.6% to $23,646.17
Ether fell 1.7% to $1,654.12

Bonds

The yield on 10-year Treasuries advanced six basis points to 3.92%
Germany’s 10-year yield advanced eight basis points to 2.56%
Britain’s 10-year yield advanced 10 basis points to 3.60%

Commodities

Brent crude fell 1.3% to $84.05 a barrel
Spot gold fell 0.9% to $1,820.64 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Rob Verdonck and Beth Thomas.