Fed, Le Pen Rattle Bonds, Airline M&A, Big Oil in Congress - What's Moving Markets

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By Geoffrey Smith 

Investing.com -- Bond markets are under pressure again. U.S. yields are at three-year highs after the Fed's Lael Brainard warned of a faster tightening of policy, while the Eurozone's are spooked by the prospect of Marine Le Pen winning the French presidency later this month. Stocks are set to open lower, with JetBlue's rival offer for Spirit Airlines (NYSE:SAVE) providing the day's main M&A action. China's services sector had a wretched March due to Covid-19, and oil prices are up as Big Oil executives prepare for a grilling in Congress from worried Democratic lawmakers. Here's what you need to know in financial markets on Wednesday, 6th April.

1. Bonds under pressure after Brainard comments; DB forecasts a recession in 2023

Bond markets are front and center again a day after Lael Brainard, President Joe Biden’s nominee as vice-chair for the Federal Reserve, warned of a “rapid” reduction of the Fed’s balance sheet as early as May.

Reacting to the comments, Deutsche Bank (DE:DBKGn) DBKGn became the first major bank to call a U.S. recession in 2023, caused by the tightening of monetary policy.

Benchmark 10-Year Treasury yields hit their highest in three years after Brainard warned of the “paramount” need to bring inflation down, using both interest rates and quantitative tightening. After a modest consolidation, they rose again overnight to stand within 1 basis point of Tuesday’s high of 2.63%.

More detail on the Fed’s discussion of the interplay between interest rates and quantitative policy is likely to emerge when the Fed publishes the minutes of its March meeting at 2 PM ET (1800 GMT).

2. Eurozone markets rattled by Le Pen progress

Bond markets in the Eurozone are also under pressure, but from a different angle. The chances of Marine Le Pen winning the French presidential elections this month have risen sharply in recent days, as the far-right, anti-EU leader has capitalized on the drop in living standards due to soaring inflation.

Macron has seen his lead over Le Pen in a two-way contest shrivel from 15 percentage points to barely 3 points in the last month. The first round of voting is due on Sunday.

The spread between the 10-Year French and German bond yields, a barometer of political risk at the heart of the Eurozone, widened to 46 basis points, its widest in more than three years.

As with the U.S., inflation fears are also haunting European bond markets. Eurozone producer prices rose 31% year-on-year in February, albeit due largely to supply squeezes rather than to overheating demand.

3. Stocks set to open lower; JetBlue's bid for Spirit in focus

U.S. stock markets are set to open lower again after falling sharply on Tuesday in reaction to comments from Brainard and Kansas City Fed President Esther George, who also warned of the need for a faster tightening of monetary policy.

By 6:15 AM ET, Dow Jones futures were down 195 points, or 0.6%. S&P 500 futures were down 0.7% while Nasdaq 100 futures were down 1.0%. The three main cash indices had fallen by between 0.8% and 2.3% on Tuesday.

Stocks likely to be in focus later include Spirit Airlines, after JetBlue crashed Frontier Airlines' (NASDAQ:ULCC) party with an all-cash bid for the discount flyer.

AT&T (NYSE:T) and Discovery (NASDAQ:DISCA) are also likely to gain attention after WarnerMedia CEO Jason Kilar and Ann Sarnoff, CEO of WarnerMedia Studios and Networks, both said they will step down ahead of the planned merger of Discovery with AT&T’s media assets.

4. Wretched March for the Chinese economy

China’s services sector followed the country’s manufacturers into contraction territory in March as ever-broader lockdowns damped the hospitality and travel sectors.

The Caixin Services PMI fell to 42 in March, its lowest since April 2020 and well below the 50 line that separates growth from contraction.

Money spent by tourists during the Qingming holiday weekend fell to less than 40% of pre-Covid levels, according to official estimates, while economists at Nomura noted that around 193 million people – accounting for some 22% of China’s GDP – are currently affected by public health measures of varying degrees of severity. That includes a near-total lockdown of activity in Shanghai.

5. Big Oil in Congress; EIA inventories due

Big Oil representatives are to testify in Congress later to give assurances that they are not exploiting this year’s surge in crude prices to indulge in price gouging.

Exxon Mobil (NYSE:XOM) Chair Darren Woods and Chevron (NYSE:CVX) CEO Mike Wirth are both likely to face a grilling from Democratic lawmakers who risk losing their control of both houses of the legislature in this year’s midterms due to popular anger at rising prices and squeezed living standards.  

By 6:25 AM ET, U.S. crude futures were up 1.6% at $103.55 a barrel, while Brent futures were up 1.5% at $108.15 a barrel. Both contracts were reacting to talk out of Europe expressing discontent at the mildness of the bloc’s latest sanctions package. The EU’s top diplomat Josep Borrell noted that the bloc has sent Russia 35 billion euros in payments for energy since it invaded Ukraine, compared to only 1 billion euros to Ukraine itself.

 The U.S. government’s weekly stockpiles data are due at 10:30 AM ET, a day after the American Petroleum Institute’s numbers showed the first rise in crude stocks in three weeks.