Stocks and bonds rose amid a bout of investor relief after the Federal Reserve raised interest rates as expected to tackle high inflation while countering fears of super-sized hikes.
Asian shares pushed higher Thursday, US futures steadied and European contracts added over 2% following the S&P 500 index’s biggest daily advance since 2020. The dollar remained lower after retreating in the Fed’s slipstream.
Australian debt surged in the wake of a pronounced slump in shorter-maturity Treasury yields as traders scaled back bets on aggressive monetary tightening.
Fed Chair Jerome Powell said a 75 basis points hike is “not something that the committee is actively considering,” spurring the market rally. The Fed raised rates a half point and signaled similar moves for the next couple of meetings.
“Removing some of the uncertainty is helpful in getting some of the cash that has been on the sideline back into the markets, whether it’s bonds or equities,” Erin Gibbs, chief investment officer at Main Street Asset Management LLC, said on Bloomberg Television.
The US central bank will also allow its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion.
The market reaction is likely to evolve as investors digest Powell’s commentary. A global wave of monetary tightening alongside commodity-fueled price pressures could yet hurt economic growth. Russia is also continuing its war in Ukraine and China’s Covid curbs are snarling global supply chains.
Climbs in oil and wheat underlined the risks. Crude hit $108 a barrel on a European Union plan to ban Russian barrels over the next six months. Wheat rose on the possibility of export curbs by major grower India.
“The market is way too optimistic about the Fed’s ability to tame inflation,” Nancy Davis, chief investment officer at Quadratic Capital Management LLC, wrote in a note. “We may be facing a stagflation environment.”
Swaps linked to Fed meetings are now pricing in less than 150 basis points of further rate increases over the June, July and September decisions. That hints at doubts about the scope for another three hikes of 50 basis points apiece.
Gold rose 1% amid the drop in yields and cooling policy-tightening expectations. That dynamic also allowed Bitcoin to hold a climb toward $40 000.
In Europe, German factory orders plummeted, highlighting the toll from the war. European Central Bank Executive Board Member Fabio Panetta said economic expansion has almost ground to a halt in the euro area.
The Bank of England is expected to raise rates later to their highest level in 13 years and clarify how it plans sell off some of its 847 billion pounds ($1.1 trillion) in government bond holdings.
Key events this week:
- 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:
- S&P 500 futures rose 0.1% as of 7:19 a.m. in London. The S&P 500 rose 3%
- Nasdaq 100 futures were little changed. The Nasdaq 100 added 3.4%
- Australia’s S&P/ASX 200 Index increased 0.8%
- Hong Kong’s Hang Seng Index added 0.5%
- China’s Shanghai Composite Index rose 0.8%
- Euro Stoxx 50 futures climbed 2.4%
- The Japanese yen was at 129.29 per dollar, down 0.2%
- The offshore yuan was at 6.6325 per dollar, down 0.2%
- The Bloomberg Dollar Spot Index was steady
- The euro was at $1.0617
- The yield on 10-year Treasuries was at 2.93%
- Australia’s 10-year yield declined about 18 basis points to 3.36%
- West Texas Intermediate crude rose 0.8% to $108.69 a barrel
- Gold was at $1 900.86 an ounce, up 1.1%