A semblance of calm returned to markets on Wednesday after the carnage sparked by hotter-than-expected American inflation that prompted investors to reassess the outlook for interest rates and economic growth.
(Bloomberg) — A semblance of calm returned to markets on Wednesday after the carnage sparked by hotter-than-expected American inflation that prompted investors to reassess the outlook for interest rates and economic growth.
US equity-index futures held modest gains after a measure of producer-prices fell for a second month in August, in line with economists’ expectations. Shares had their biggest drop in more than two years Tuesday, with the S&P 500 falling more than 4% and the Nasdaq 100 sliding more than 5%. A gauge of the dollar retreated after jumping the most in three months on Tuesday. The 10-year Treasury yield rose about five basis points.
While the magnitude of Tuesday’s equities rout was impressive, the S&P 500 only reversed gains made in the previous four sessions that had been fueled by expectations of cooling inflation that would give the Federal Reserve room to temper its tightening path. The lack of a surge in the VIX index — known as the “fear gauge” — suggests that the selloff was a recalibration of those expectations rather than panic selling.
“Heading into the August CPI print, a number of traders thought they had information, and positioned very aggressively in the cash equity and derivatives markets,” said Christopher Harvey, head of equity strategy at Wells Fargo. “It turns out they did not have any real information on CPI (only a hunch based upon recent trends), and now they do not have as much AUM.”
Swaps traders are now pricing in a hike of three-quarters of a percentage point next week, with some wagers appearing for a full-point move. The two-year Treasury yield, the most sensitive to policy changes, rose two basis points after jumping as much as 22 basis points Tuesday, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning.
“An easing in inflationary pressure later this year will allow the Fed to broaden its focus again in order to manage the economic slowdown. However, we are not there yet,” said Mathieu Racheter, head of equity strategy at Bank Julius Baer. “In the meantime, earnings estimates will likely continue to be adjusted downwards, while higher real rates keep valuations at bay. For now, we recommend staying defensively positioned.”
The Stoxx Europe 600 index slipped more than 1%, adding to Tuesday’s 1.6% drop. Utilities were the among the worst-performing sectors as the European Commission considers plans to contain the energy crisis, which may include revenue caps. Retailers gained, led by Inditex SA after the owner of the Zara fashion chain reported a jump in profit.
Read more: ‘They Should Do 100’: Traders Debate the Fed’s Next Rate Move
Asian stocks and bonds tumbled in the wake of the broad-based selloff on Wall Street while the yen strengthened after Japan warned of possible intervention in the currency market. Equity indexes in Japan, Hong Kong and Australia slumped.
The yen pulled back from a slide toward the key 145 level versus the dollar after a Nikkei report that the Bank of Japan conducted a so-called rate check with traders to see the price of the currency against the greenback. The finance minister warned he wouldn’t rule out any response if current trends continued. The country’s 10-year bond yield rose to 0.25%, the upper end of the central bank’s policy band.
Read more: Biggest Jump in US Rents Since 1991 Keeps Overall Inflation High
The greenback’s strength weighed on Asian currencies, with the Korean won among the big decliners. The People’s Bank of China set the daily reference rate for the yuan at the strongest bias on record versus the average estimate in a Bloomberg survey of analysts and traders. An index of emerging-market stocks fell 1.7%
“Many emerging markets are feeling the heat of the strong US dollar,” said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, citing their debt burdens in greenbacks. “Only China can afford to defy this global rate-rise trend by keeping its easing policy stance.”
Bitcoin nursed a drop of almost 10% overnight, the biggest decline since cryptocurrencies plunged in June.
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Here are some key events to watch this week:
- US business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday
- China home sales, retail sales, industrial production, fixed assets, surveyed jobless rate, Friday
- Euro area CPI, Friday
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- Futures on the S&P 500 rose 0.2% as of 8:37 a.m. New York time
- Futures on the Nasdaq 100 rose 0.2%
- Futures on the Dow Jones Industrial Average were little changed
- The Stoxx Europe 600 fell 1.1%
- The MSCI World index fell 0.6%
Currencies
- The Bloomberg Dollar Spot Index fell 0.2%
- The euro rose 0.3% to $0.9999
- The British pound rose 0.5% to $1.1555
- The Japanese yen rose 1% to 143.16 per dollar
Bonds
- The yield on 10-year Treasuries advanced six basis points to 3.46%
- Germany’s 10-year yield advanced four basis points to 1.77%
- Britain’s 10-year yield advanced three basis points to 3.20%
Commodities
- West Texas Intermediate crude fell 0.1% to $87.22 a barrel
- Gold futures fell 0.2% to $1,713.20 an ounce
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