Global equity markets swung between profit and loss and Treasury yield curves flattened as traders braced for the widely anticipated move by the Federal Reserve toward a tightening of policy.
Futures on the S&P 500 Index and the Dow Jones Industrial Average turned shortly after the underlying indicators rose to records on Tuesday. The two-year Treasury yield remained stable, while the 30-year rate lost three basis points. European stocks struggled for direction and the dollar fell less than 0.1%.
A widely communicated game-changing moment awaited traders, as the Fed could begin to reduce stimulus in a first step toward an eventual increase in interest rates. Policymakers have come under pressure to reassess their assessment that inflation is transitory, with bond and currency markets posting faster-than-expected rate hikes.
“The big question will be whether they will give any signs of when the rate hikes will start,” Jeanette Garretty, chief economist at Robertson Stephens Wealth Management, told Bloomberg Television. “I think they are going to try to avoid it.”
Bond markets are experiencing increased volatility as signs of persistent inflation make a tightening of the central bank increasingly likely. Yet equity markets have jumped from record to record as the post-pandemic recovery boosts corporate earnings.
Of the 347 S&P 500 companies that have reported the latest quarterly results, 83% have beaten estimates. That has encouraged analysts to raise their 12-month earnings forecast to a record high, showing a 31% increase in 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 graduated communication has eased the pace of this adjustment, but mounting risks in the global economy continue to fuel the turmoil.
Stocks fell in China and Hong Kong after Prime Minister Li Keqiang’s warning that the world’s second-largest economy faces further downward pressure. The nation is also dealing with its most widespread coronavirus outbreak since the start of the pandemic.
The European Stoxx 600 indicator fluctuated between gains and losses. Vestas Wind Systems A / S fell as much as 15%, the most since 2017, after trimming its full-year outlook on supply chain challenges.
In premarket operations in the US, Activision Blizzard Inc. fell 12%. The video game publisher, facing lawsuits for discrimination and sexual harassment, delayed two of its most highly anticipated games and gave a forecast for the fourth quarter that lags behind expectations.
While a commodity gauge fell on Wednesday, iron ore futures rallied after a five-day slide. Crude oil traded lower, with the Brent and West Texas Intermediate contracts falling at least 1.2% each.
The yield spread between 30- and 2-year US government bonds narrowed by three basis points. The gap has been narrowing as rate hikes support short-term rates, while growth concerns limit longer-term ones.
Here are some events to watch this week:
- Fed rate decision, factory orders and US durable goods, Wednesday
- OPEC + meeting on production, Thursday
- Bank of England rate decision, Thursday
- US Trade, Initial Unemployment Claims, Thursday
- Unemployment in the US, Non-Farm Payrolls, Friday
Some of the main movements in the markets:
- The Stoxx Europe 600 was little changed at 9:25 am London time
- S&P 500 futures changed little
- Nasdaq 100 futures rose 0.1%
- Dow Jones Industrial Average futures changed little
- The MSCI Asia Pacific Index was little changed
- The MSCI emerging markets index fell 0.2%
- The Bloomberg Dollar Spot Index was little changed
- The euro was up 0.1% to $ 1.1591.
- The Japanese yen changed little to 113.85 per dollar
- The offshore yuan rose 0.1% to 6.3946 per dollar.
- The British pound changed little to $ 1.3625
- The 10-year Treasury yield fell three basis points to 1.52%.
- Germany’s 10-year yield decreased two basis points to -0.18%.
- The UK 10-year yield fell two basis points to 1.02%.
- Brent crude fell 1.4% to $ 83.57 a barrel
- Spot gold fell 0.3% to $ 1,781.64 an ounce
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