Stocks Fall as Market Absorbs Bets on Rising Rates: Markets Wrap

(Bloomberg) — Stock markets worldwide extended losses on Thursday, as US 10-year Treasury bonds topped 4% for the first time since November in a sign that the Federal Reserve’s warnings of higher-for-longer interest rates are finally sinking in.

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Europe’s Stoxx 600 equity index held a loss of about 0.5% after euro-area inflation slowed by less than anticipated and underlying price pressures surged to a new record, heaping pressure on the European Central Bank to drive up rates further. US equity futures also fell, with contracts on the rate-sensitive Nasdaq underperforming after both it and the S&P 500 index ended February with losses.

The focus now is on how much higher interest rates might go in the US and eurozone, with swaps markets now pricing a peak Fed policy rate of 5.5% in September, and some even betting on 6%. US 10-year yields, the main reference rate for the global cost of capital, rose 40 basis points in February and are consolidating their rise past 4%. ECB interest rates are now seen rising above 4% and German benchmark bond yields traded at 2.75% after soaring around 75 basis points since a January low.

“We have upgraded our terminal Fed forecast to 5.75% which is above what markets are pricing — we do think the US economy is proving highly resilient because of excess savings and a strong labor market,” Thomas Hempell, head of macro and market research at Generali Investments, said in an interview. “Data has poured cold water on the disinflation process and markets are highly alert to anything that alters the inflation outlook.”

That’s damping appetite for risk taking in markets around the world, with some even expressing concern that China’s post-Covid economic recovery could exacerbate global price pressures.

China’s reopening is a much-needed bright spot for investors, but in terms of inflation “adds cyclical upside pressure because of the sheer amount of demand” that it brings, especially in commodities, Charu Chanana, senior markets strategist at Saxo Capital Markets, said on Bloomberg Television.

The hawkish Fed rate bets supported the US dollar against its Group-of-10 counterparts, with the greenback looking set to extend February’s 2.6% gain.

Oil was slightly lower after a two-day gain as traders weighed the potential revival in Chinese demand against concerns over tighter US monetary policy.

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 fell 0.4% as of 10:18 a.m. London time
S&P 500 futures fell 0.6%
Nasdaq 100 futures fell 0.8%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index fell 0.4%
The MSCI Emerging Markets Index fell 0.3%

Currencies

The Bloomberg Dollar Spot Index rose 0.3%
The euro fell 0.4% to $1.0622
The Japanese yen fell 0.3% to 136.54 per dollar
The offshore yuan fell 0.4% to 6.9051 per dollar
The British pound fell 0.5% to $1.1967

Cryptocurrencies

Bitcoin fell 0.7% to $23,396.65
Ether fell 1% to $1,641.16

Bonds

The yield on 10-year Treasuries advanced four basis points to 4.04%
Germany’s 10-year yield advanced four basis points to 2.75%
Britain’s 10-year yield advanced two basis points to 3.86%

Commodities

Brent crude rose 0.4% to $84.62 a barrel
Spot gold fell 0.3% to $1,831.59 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Rheaa Rao, Tassia Sipahutar and Brett Miller.