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Stocks, bonds waver before Fed moment of reckoning: markets wrap

Global equity markets swung between gains and losses and Treasury yield curves flattened as traders braced for the Federal Reserve’s widely expected move toward policy tightening.

Futures on the S&P 500 Index and the Dow Jones Industrial Average were little changed after the underlying gauges rose to records on Tuesday. The two-year Treasury yield was steady, while the 30-year rate shed three basis points. European stocks struggled for direction and the dollar fell less than 0.1%.

A widely communicated yet game-changing moment awaited traders, as the Fed may start tapering stimulus in a first step toward an eventual increase in interest rates. Policy makers have come under pressure to reassess their assessment of inflation being transitory, with bond and currency markets pricing in faster-than-expected rate hikes.

“The big question will be whether they will signal anything about when the rate hikes will start,” Jeanette Garretty, chief economist at Robertson Stephens Wealth Management, said on Bloomberg Television. “I think they are going to try and avoid that.”

Bond markets are witnessing a surge in volatility as signs of persistent inflation make central-bank tightening ever more likelier. Yet, equity markets have jumped from one record to another as the post-pandemic recovery fuels corporate profits.

Of the 347 companies in the S&P 500 that have reported the latest quarterly results, 83% have surpassed estimates. That has emboldened analysts to raise forecasts for 12-month profits to a record, showing a 31% surge in the projections this year.

However, a sense of caution prevails as markets move to reset bond yields and equity risk premiums in line with expectations for higher benchmark rates. The Fed’s policy of gradual and graded communication has alleviated the pace of this adjustment, but growing risks in the global economy continue to fuel turbulence.

Shares declined in China and Hong Kong after Premier Li Keqiang’s warning that the world’s second-largest economy faces new downward pressures. The nation is also grappling with its most widespread coronavirus outbreak since the start of the pandemic.

Europe’s Stoxx 600 gauge fluctuated between gains and losses. Vestas Wind Systems A/S tumbled as much as 15%, the most since 2017, after cutting its full-year outlook on supply-chain challenges.

In US premarket trading, Activision Blizzard Inc. tumbled 12%. The video-game publisher, which faces lawsuits for sexual discrimination and harassment, delayed two of its most anticipated games and gave a fourth-quarter forecast that trails expectations.

While a gauge of commodities fell on Wednesday, iron ore futures rebounded after a five-day slump. Crude oil traded lower, with both Brent and West Texas Intermediate contracts falling at least 1.2% each.

The yield spread between 30-year and two-year US government bonds narrowed three basis points. The gap has been shrinking as rate-hike bets support short-term rates while growth concerns cap longer-term ones.

Here are some events to watch this week:

  • Fed rate decision, US factory orders and durable goods, Wednesday
  • OPEC+ meeting on output, Thursday
  • Bank of England rate decision, Thursday
  • US trade, initial jobless claims, Thursday
  • US unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

  • The Stoxx Europe 600 was little changed as of 9:25 a.m. London time
  • Futures on the S&P 500 were little changed
  • Futures on the Nasdaq 100 rose 0.1%
  • Futures on the Dow Jones Industrial Average were little changed
  • The MSCI Asia Pacific Index was little changed
  • The MSCI Emerging Markets Index fell 0.2%

Currencies

  • The Bloomberg Dollar Spot Index was little changed
  • The euro rose 0.1% to $1.1591
  • The Japanese yen was little changed at 113.85 per dollar
  • The offshore yuan rose 0.1% to 6.3946 per dollar
  • The British pound was little changed at $1.3625

Bonds

  • The yield on 10-year Treasuries declined three basis points to 1.52%
  • Germany’s 10-year yield declined two basis points to -0.18%
  • Britain’s 10-year yield declined two basis points to 1.02%

Commodities

  • Brent crude fell 1.4% to $83.57 a barrel
  • Spot gold fell 0.3% to $1 781.64 an ounce

© 2021 Bloomberg

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