Bonds Drop, U.S. Futures Rise as Fed Hike Looms: Markets Wrap

(Bloomberg) — Bonds fell Wednesday and US equity futures fluctuated as investors braced for the biggest Federal Reserve interest rate-hike since 2000 and awaited more clues on how aggressively it will tackle inflation.

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Retailers led a drop in Europe’s Stoxx 600 Index after Boohoo Group Plc warned that revenue growth may grind to a halt. Energy companies led Russian stocks lower as the European Union announced plans to gradually ban oil imports from the country this year. The EU is also proposing to cut off Sberbank and other lenders from the international SWIFT payment system.

Global bonds are wilting under a wave of monetary tightening, with German 10-year yields at 1% and the UK’s near 2%. Yields on the safest sterling corporate bonds have risen above their pandemic peak just as Bank of England policy makers weigh lifting rates to their highest level since the global financial crisis.

Adding to the tightening outlook, European Central Bank Executive Board Member Isabel Schnabel said it’s time for policy makers to take action to tame inflation, and that an interest-rate hike might come as early as July.

Treasuries were steady, with the 10-year yield nudging 3%, while a gauge of the dollar held near two-year highs. The greenback’s strength reflects caution about an array of risks tension tightening financial conditions, China’s Covid lockdowns and Russia’s war in Ukraine.

Oil climbed and gold was little changed.

The Fed is expected to raise rates by 50 basis points Wednesday and detail plans for the reduction of its balance sheet. Key for markets will be whether Chair Jerome Powell’s commentary contains any hawkish surprises that could stoke concerns about the threat of US slowdown as borrowing costs climb.

“There is a difficult set up in general for risk assets” as valuations remain stretched despite a drop in equities, Kathryn Koch, chief investment officer for public markets equity at Goldman Sachs & Co., said on Bloomberg Television. She added that “some people think stagflation is a real risk.”

Half-point Fed moves are fully priced in by swaps traders for June, July and September — the most aggressive trajectory in three decades. Any indications that a bigger, 75-basis-point increase is a possibility could roll markets.

The latest US data showed record levels of job opening and workers quitting in March, pointing to the prospect of higher wages feeding into price pressures.

“The Fed remains very focused on bringing inflation down, however, any further hawkish pivots will likely be tempered to some extent by the desire to achieve a soft landing,” Blerina Uruci, US economist at T. Rowe Price Group Inc., wrote in a note.

In premarket trading, Lyft Inc. plunged and was poised to wipe off more than a quarter of its market valuation on Wednesday after the ride-hailing company’s second-quarter outlook disappointed Wall Street, highlighting investors’ willingness to dump growth stocks at the first hint of trouble.

Didi Global Inc. led a drop in US-listed Chinese internet stocks after news of a US Securities and Exchange Commission investigation into the ride-hailing company’s 2021 debut in New York added to investor concerns around the sector.

Europe and the conflict in Ukraine is the theme of this week’s MLIV Pulse survey. Given the ECB is edging toward the end of quantitative easing, is it inevitable that Europe will have a hard landing and how would that affect assets? It only takes a minute and is anonymous, so share your thoughts in the survey by clicking, here.

Key events this week:

  • 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

  • The Stoxx Europe 600 fell 0.4% as of 9:39 am London time

  • S&P 500 futures rose 0.3%

  • Nasdaq 100 Futures Rose 0.2%

  • Futures on the Dow Jones Industrial Average rose 0.2%

  • The MSCI Asia Pacific Index was little changed

  • The MSCI Emerging Markets Index fell 0.3%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0527

  • The Japanese yen was little changed at 130.05 per dollar

  • The offshore yuan was little changed at 6.6468 per dollar

  • The British pound rose 0.1% to $1.2513

bonds

  • The yield on 10-year Treasuries was little changed at 2.97%

  • Germany’s 10-year yield advanced three basis points to 1.00%

  • Britain’s 10-year yield advanced three basis points to 1.98%

Commodities

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