Stock rally pauses, bond markets reflect on risks to US economy

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 30, 2022. REUTERS/Brendan McDermid

Join now for FREE unlimited access to Reuters.com

Register

  • The Euro STOXX 600 falls by 0.6%
  • US bond market signals coming economic crisis
  • 10-year Treasury yields fall
  • Negotiations between Ukraine and Russia supported earlier actions
  • Wall Street down

LONDON/NEW YORK, March 30 (Reuters) – The rally in U.S. and European stocks halted on Wednesday as investors took stock of economic and geopolitical risks, while oil prices jumped around $4. in view of new Russian sanctions.

The broad Euro STOXX 600 index (.STOXX) fell 0.6% after three positive sessions that brought the index back to levels reached before Russia invaded Ukraine.

By late morning, the Dow Jones Industrial Average (.DJI) was down 0.18%, at 35,229.04, the S&P 500 (.SPX) was down 0.25% and the Nasdaq Composite (.IXIC) had changed little.

Join now for FREE unlimited access to Reuters.com

Register

The MSCI World Equity Index (.MIWD00000PUS), which tracks stocks from 50 countries, was also little changed.

Relative encouragement from equity investors contrasted with wariness in the bond market, where some investors are betting that aggressive policy tightening by the US Federal Reserve could hurt the world’s largest economy in the long term.

“I’m very worried that US equities don’t price in any downside risk to the US economy – that’s extremely worrying,” said Ludovic Colin, senior portfolio manager at Swiss asset manager Vontobel.

The widely followed 2-year and 10-year U.S. Treasury yield curve briefly inverted on Tuesday for the first time since September 2019.

Longer-term yields falling below short-term yields indicate a lack of confidence in future growth, with 10-year yields falling below 2-year rates widely seen as a harbinger of recession.

Sebastien Galy, senior macro strategist at Nordea Asset Management, said the fixed income and equity markets were diverging.

“Stock markets are too optimistic and fixed income markets are probably too pessimistic.”

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

Benchmarks Frankfurt (.GDAXI) and Paris (.FCHI) lost 1.5% and 1.1% respectively, while London (.FTSE) shares edged up 0.19%.

US yield curve inverts

A day after surpassing 0% for the first time since 2014, the yield on German two-year bonds rose six basis points to 0.01%, keeping yesterday’s highs in sight.

Stocks rallied in Asia overnight after Ukraine on Tuesday offered to adopt neutral status, a move seen by investors as a sign of progress in face-to-face peace talks. Read more

On the ground, however, reports of attacks continued and Ukraine reacted with skepticism to Russia’s promise in negotiations to scale back military operations around Kyiv.

MSCI’s broadest non-Japan Asia-Pacific equity index (.MIAPJ0000PUS) jumped 1.46% to its highest level in nearly a month, with most Asian stock markets in positive territory.

JAPAN IN THE SPOTLIGHT

The US benchmark 10-year yield was last at 2.3762%, after hitting 2.557% on Monday for its highest level since April 2019, as traders positioned themselves for rapid increases in US interest rates .

The impact of rising US yields played out elsewhere, dragging Japanese government bond yields in their wake, threatening Japan’s ultra-loose monetary policy.

On Wednesday, the Bank of Japan stepped up its efforts to defend its main yield ceiling, proposing to step up buying of government bonds across the curve, including unforeseen emergency market operations. Read more

The widening spread between US and Japanese yields weakened the yen sharply, but it managed to regain some lost ground on Wednesday.

The Japanese currency rose 0.9% to 121.80 to the dollar, from Monday’s low of 124.3, as Japanese authorities feared to intervene to strengthen the yen.

Elsewhere in the currency markets, the euro rose 0.6% to $1.1157, its highest level in four weeks, supported by Russian-Ukrainian peace talks.

In energy markets, oil prices jumped around $4 amid supply shortages and the growing prospect of further Western sanctions on Russia even as Moscow and kyiv held peace talks .

Brent crude LCOc1 futures rose $3.96, or 3.6%, to $114.19, while U.S. crude rose 3.66% to $108.05 a barrel.

Join now for FREE unlimited access to Reuters.com

Register

Reporting by Tom Wilson in London, additional reporting by Dhara Ranasinghe and Alun John in Hong Kong Editing by Bernadette Baum and Mark Potter

Our standards: The Thomson Reuters Trust Principles.

Comments are closed.