Bonds Mixed as Rate Hikes Loom; Futures Decline: Markets Wrap

(Bloomberg) — Bonds were mixed, while US equity index futures fell as investors braced for the biggest rate hike from the Federal Reserve since 2000 and a wave of policy tightening by other central banks.

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The US 10-year yield held near 3% after hitting the milestone on Monday. Germany’s benchmark rate rose above 1% for the first time since 2015, before reversing slightly, while the corresponding yield on UK bonds climbed above 2% earlier on Tuesday. Australian bonds slid after the nation’s central bank increased borrowing costs by more than many had expected.

Contracts on US benchmarks slipped, with bank stocks mostly lower in premarket trading as German prosecutors raided the Frankfurt offices of Morgan Stanley. European stocks gave up earlier gains as investors shifted their attention to the monetary policy outlook.

Markets are getting whipsawed between concerns around persistent inflationary spirals and risks to global growth from rising yields, China’s Covid lockdowns and Russia’s war in Ukraine. The Fed’s plans to raise rates and reduce its balance sheet have ended an era of cheap money and forced money managers to reassess valuations.

“The right strategy right now is to position for inflation — a clear and present fact — rather than recession, which is still only a possibility,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note.

In Australia, the three-year yield topped 3% for the first time since 2014 after the Reserve Bank increased interest rates by more than economists anticipated and signaled further hikes to come.

Next up is the Federal Reserve on Wednesday. The UK is expected to raise borrowing costs a day later.

European stocks struggled to hold onto gains after Monday’s flash crash, which had sent shares across the continent tumbling after a sudden 8% decline in Swedish stocks. Citigroup Inc. said its London trading desk was behind the anomalous move.

BP Plc shares climbed after the oil major boosted its share buyback by $2.5 billion as cash flow surged. BNP Paribas SA jumped after reporting gains in both equities and fixed-income trading.

Asian equities were whipsawed by big swings in Alibaba Group Holding Ltd. in Hong Kong on concerns about the status of co-founder Jack Ma. HSBC Holdings Plc shares in Hong Kong rose after it emerged late Friday that the bank’s largest active investor would support a breakup of the lender on the basis that a separate Asia-listed unit would create shareholder value.

A gauge of the dollar held at a two-year high, while the euro and the pound were little changed. The Bank of England this week is expected to raise interest rates to a 13-year high and clarify plans for selling its government-bond holdings. Markets are wagering on almost four 25-basis-point hikes by the European Central Bank this year.

Crude oil fell as traders weighed demand for refined products against challenges from the virus-induced slowdown in China.

Meanwhile, Italy’s Prime Minister Mario Draghi called for a swift rethink of European Union mechanisms to allow the bloc to face the unprecedented challenges linked to Russia’s invasion of Ukraine and soaring energy prices.

Russia’s closely watched dollar payments on two bonds are trickling through to investors after the country dipped into its local holdings of the US currency and sidestepped its first foreign default in a century.

To participate in this week’s MLIV Pulse Survey, which focuses on the market fallout from the war in Ukraine, please click here.

Key events this week:

  • US factory orders, durable goods, Tuesday

  • 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:

Stocks

  • Futures on the S&P 500 fell 0.4% as of 7:25 am New York time

  • Futures on the Nasdaq 100 fell 0.4%

  • Futures on the Dow Jones Industrial Average fell 0.4%

  • The Stoxx Europe 600 was little changed

  • The MSCI World index was little changed

currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0506

  • The British pound was little changed at $1.2503

  • The Japanese yen was little changed at 130.09 per dollar

Bonds

  • The yield on 10-year Treasuries declined one basis point to 2.97%

  • Germany’s 10-year yield declined two basis points to 0.95%

  • Britain’s 10-year yield advanced five basis points to 1.96%

commodities

  • West Texas Intermediate crude fell 1.3% to $103.77 a barrel

  • Gold futures fell 0.2% to $1,859.60 an ounce

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