Bonds fell Wednesday and US equity futures were little changed as investors braced for the biggest Federal Reserve interest rate-hike since 2000 and awaited more clues on how aggressively it will tackle inflation.
Miners led a drop in Europe’s Stoxx 600 Index, while Russia’s MOEX Index reversed earlier gains after the European Union planned to ban Russian crude oil over the next six months and refined fuels by the end of the year as part of a sixth round of sanctions to increase pressure on Vladimir Putin over his invasion of Ukraine. The EU is also proposing to cut off Sberbank and other lenders from the international SWIFT payment system.
A further plunge in Australian debt typified how bonds are wilting under a global wave of monetary tightening. Treasuries were steady at the European open, with the 10-year yield nudging 3%. Oil climbed and gold was little changed.
A gauge of the dollar held near two-year highs. The greenback’s strength reflects caution over an array of risks spanning tightening financial conditions, China’s Covid lockdowns and Russia’s war in Ukraine.
The Fed is expected to raise rates by 50 basis points Wednesday and detail plans for the reduction of its balance sheet. Key for markets will be whether Chair Jerome Powell’s commentary contains any hawkish surprises that could stoke concerns about the threat of US slowdown as borrowing costs climb.
“There is a difficult set up in general for risk assets” as valuations remain stretched despite a drop in equities, Kathryn Koch, chief investment officer for public markets equity at Goldman Sachs & Co., said on Bloomberg Television. She added that “some people think stagflation is a real risk.”
Half-point Fed moves are fully priced in by swaps traders for June, July and September — the most aggressive trajectory in three decades. Any indications that a bigger, 75-basis-point increase is a possibility could roil markets.
The latest US data showed record levels of job openings and workers quitting in March, pointing to the prospect of higher wages feeding into price pressures.
“The Fed remains very focused on bringing inflation down, however, any further hawkish pivots will likely be tempered to some extent by the desire to achieve a soft landing,” Blerina Uruci, US economist at T. Rowe Price Group Inc., wrote in a note.
In Asia, stocks dropped amid a slide in Chinese technology firms in Hong Kong. Sentiment soured toward the latter after the US began a probe into Didi Global Inc.’s chaotic 2021 debut in New York. Japan and China were shut for holidays.
Key events this week:
- Fed rate decision, briefing with Chair Jerome Powell, Wednesday
- EIA crude oil inventory report, Wednesday
- Bank of England rate decision and briefing, Thursday
- OPEC+ convenes virtually for a regular meeting, Thursday
- US April jobs report, Friday
Some of the main moves in markets:
- The Stoxx Europe 600 fell 0.3% as of 8:30 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 unchanged
- The MSCI Asia Pacific Index was little changed
- The MSCI Emerging Markets Index fell 0.3%
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0511
- The Japanese yen was little changed at 130.10 per dollar
- The offshore yuan was little changed at 6.6479 per dollar
- The British pound was little changed at $1.2491
- The yield on 10-year Treasuries was little changed at 2.96%
- Germany’s 10-year yield advanced four basis points to 1.00%
- Britain’s 10-year yield advanced three basis points to 1.99%
- Brent crude rose 2.6% to $107.65 a barrel
- Spot gold was little changed