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Stocks rally fizzles, bond markets ponder risks for U.S. economy

Stock Markets Mar 30, 2022 09:00PM ET
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2/2 © Reuters. FILE PHOTO: A man stands on an overpass with an electronic board showing Shanghai and Shenzhen stock indexes, at the Lujiazui financial district in Shanghai, China January 6, 2021. REUTERS/Aly Song// 2/2

By Koh Gui Qing

NEW YORK (Reuters) - The U.S. and European equities rally wavered on Wednesday as investors reviewed economic and geopolitical risks, while oil prices jumped more than $2 on the prospect of more Russian sanctions.

The breather in stocks followed three to four straight days of gains that more than erased losses sustained when Russia invaded Ukraine five weeks ago, and came as bond investors wondered whether the U.S. Federal Reserve's policy tightening could harm the world's biggest economy over the longer term.

A key part of the U.S. yield curve briefly inverted on Tuesday in what is widely viewed as a harbinger of a recession, although it has since reverted.

"We see further equity upside medium-term given a robust growth picture, low bar for first-quarter earnings, and narrowing credit spreads," analysts at JP Morgan's Global Markets Strategy said.

"We see too much negativity around the Fed since the start of Fed tightening cycles proved positive for equities historically, and policy is easing in Japan and China."

The Dow Jones Industrial Average ended down 0.19%, the S&P 500 fell 0.63%, and the Nasdaq Composite shed 1.2%.

Europe's broad Euro STOXX 600 lost 0.4%, while the MSCI world equity index, which tracks shares in 50 countries, eased 0.32%.

The widely tracked yield curve showing the difference between two- and 10-year U.S. Treasury yields bounced back to 4 basis points on Wednesday. It had briefly inverted to minus 0.03 of a basis point on Tuesday for the first time since September 2019. [US/]

Longer-dated yields falling below shorter ones indicate a lack of faith in future growth. A drop in 10-year yields below 2-year rates signals a recession.

Sebastien Galy, a senior macro strategist at Nordea Asset Management, said fixed income and equity markets are diverging in their outlooks and the split bears watching.

"Equity markets are overly optimistic and the fixed income markets are probably being overly pessimistic."

An inverted Treasury curve has in recent decades been followed by a recession within two years, including the 2020 downturn caused by the COVID-19 pandemic.

Benchmark indexes in Frankfurt and Paris lost 1.5% and 0.74% respectively, while London shares bucked the trend and jumped 0.55%.

Title: U.S. yield curve inverts, https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgqbwzpb/morningbid.PNG

A day after rising above 0% for the first time since 2014, Germany's two-year bond yield was up 6 basis points at 0.01% - keeping the previous day's highs in sight.

Shares rallied in Asia overnight after Ukraine proposed on Tuesday that it adopt neutral status, a sign of progress in face-to-face peace talks.

On the ground, attacks continued and Ukraine reacted with scepticism to Russia's promise in negotiations to scale down military operations around Kyiv.

MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.36% to its highest level in nearly a month, with most Asian stock markets in positive territory.

JAPAN IN FOCUS

The benchmark U.S. 10-year yield was last at 2.3415%, after rising to 2.557% on Monday, its highest level since April 2019, as traders geared up for quick-fire U.S. interest rate hikes.

Rising U.S. yields have also lifted government bond yields in Japan, where inflation is running below target and where the central bank wants yields to stay low.

The Bank of Japan increased efforts to defend its key yield cap on Wednesday, offering to ramp up buying of government bonds across the curve, including unscheduled emergency market operations.

The widening gap between U.S. and Japanese yields has caused the yen to weaken sharply, but it pared losses on Wednesday.

The Japanese currency rose 0.9% to 121.81 per dollar from Monday's low of 124.3, amid concerns Japanese authorities might step in to bolster the yen. [FRX/]

Elsewhere in currency markets, the euro rose 0.6% to $1.1156, its highest in four weeks, supported by the Russia-Ukraine peace talks.

In commodities, oil prices jumped more than $2 on supply tightness and the growing prospect of new Western sanctions against Russia even as Moscow and Kyiv held peace talks.

Brent crude futures were up $2.28, or 2.1%, at $112.51, while U.S. crude rose 2.9% to $107.3 per barrel. [O/R]

Spot gold added 0.8% to $1,935.38 an ounce. [GOL/]

Stocks rally fizzles, bond markets ponder risks for U.S. economy
 

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Comments (11)
Todd Gray
Todd Gray Mar 30, 2022 1:03PM ET
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We know all this. Inverted yield curves, in times as this, always proceed a final run to the big pop. Could be different this time, but we'll see. Simple reason is cash is rapidly devaluing, right now. On another note, there is almost no truth in the left. The few who want to dessent can't, or are drowned out by the volume of propoganda. The sign of the stage and the grandchildren of Chaos and Disorder.
Samer Diab
Samer Diab Mar 30, 2022 1:03PM ET
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watch the 5 year 3 months and the 10 year 3 months for better indication as to when the recession will happen. once these invert sell everything:)
Trumpster Rocks
Trumpster Rocks Mar 30, 2022 10:19AM ET
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You think? Why the market is coming back some today is laughable... All the #'s were Very bad and gold silver and oil are skyrocketing but put a spin on it.....geez the left never tells the truth do they?
John Lakran
John Lakran Mar 30, 2022 8:11AM ET
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Inverted Yields have nothing to do with the economy it is simply a measuring scale of what fund managers think will happen. If they think a slowdown they make the yields invert so in reality correlation does not imply causation. Same as oil, oil goes up not because of an actual supply issue but because of a mkt perceived potential for shortage.
Marco cuevas
Marco cuevas Mar 30, 2022 6:17AM ET
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Futures controlled bybthebmedia.and.their.overlords.
Marco cuevas
Marco cuevas Mar 30, 2022 5:51AM ET
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Oh please why can't you guys ever have a headline "hedge funds and daybtraders take profits" racket
jason xx
jason xx Mar 30, 2022 5:36AM ET
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Do people seriously believe the 10 to 2yr curve inverting in 2019 predicted Covid? It's not voodoo chicken bones you know. It's a coincidence at best. Haven't you heard correlation does not equal causation?
Benjamin USA
Benjamin USA Mar 30, 2022 5:36AM ET
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Huh?
Joel Schwartz
Joel Schwartz Mar 30, 2022 12:54AM ET
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So why hasn’t oil given up all “Russian fear” rally yet?
Ac Tektrader
Ac Tektrader Mar 30, 2022 12:40AM ET
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Randall I don't know what technical indicators you're using, the ones I use signaled a rally back to at least 4705 on the S&P500..
Randall Paul
Randall Paul Mar 30, 2022 12:26AM ET
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I love how the dow futures defies all techbical indictators
David Vaughan
David Vaughan Mar 29, 2022 11:56PM ET
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Great! Now global shares will join the Asia rallv tomorrow 🚀
 
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