The steepest market sell-off of the year so far looked to have fizzled out on Tuesday, as traders waited to see if the head of the Federal Reserve gives any new insights later on where U.S. and therefore global interest rates are now heading.
The Australian dollar had already bolted upwards after its central bank signalled it would keep hiking while the yen had galloped higher after some unusually strong Japanese wage data.
Europe was more mixed though, with the euro and pound both limping lower and only London’s FTSE (.FTSE) making any real headway out of the main share indexes as BP (BP.L) became the latest oil giant to post bumper profits.
There was plenty of time for that to change, with one of the ECB’s top policymakers, Isabel Schnabel, due to speak as well as two Bank of England deputy governors and its chief economist.
Then comes Federal Reserve Chairman Jerome Powell at the Economic Club of Washington in his first major outing since Friday’s strong U.S. jobs data, plus U.S. President Joe Biden’s State of the Union address.
“It’s still all about the central banks, you are still trying to understand their reaction function,” said Sahil Mahtani, a multi-asset strategist at investment firm Ninety One.
The firm continues to expect recessions to take hold in major economies, mainly because interest rates in rich countries such as the United States have gone up at the third fastest rate since the early 1970’s over the last year.
“The market is positioned for a soft landing, we are positioned for a hard landing,” Mahtani said.
An ECB survey on Tuesday showed euro zone inflation expectations were still edging up at the end of last year, while Fed Minneapolis President Neel Kashkari was out saying he still thought U.S. rates should rise to at least 5.4% from their current 4.5%-4.75% range.
“Nobody should overreact to one report” he said referring to Friday’s payrolls data, but noted the services sector remained very robust.
Asian stocks stabilised overnight after they, like most global share markets, had suffered steep losses following that U.S jobs data.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) ended up 0.2% although Australia’s S&P/ASX200 (.AXJO) slipped nearly 0.5% after the RBA delivered its ninth consecutive hike and signalled more were likely. Australia’s cash rate now stands at 3.35%, a decade high.
U.S. stock index futures edged higher ahead of the start of trading in New York. Fed’s Powell’s is due to speak at 12:40 p.m. EST (1740 GMT) while Biden will deliver his second State of the Union address at about 9 p.m. (0200 GMT Wednesday).
It is a speech that may mark the unofficial start of the 2024 presidential campaign season and give Biden a chance to shape public perceptions of the debt limit, social spending, the Russian war in Ukraine and tensions with China.
Back in the markets, the day’s other major move was oil’s jump for a second straight session on optimism about recovering demand in China but also after devastating earthquakes in Turkey shut down one of the region’s major oil export terminals.
Brent was up roughly $1, or 1.2%, to $81.98 per barrel. Turkey’s main stock market (.XU100), which soared 200% last year as locals sought protection from eyewatering inflation, dropped 9% though in its biggest fall in almost two years.
In the bond markets, benchmark government bond yields were just starting to creep higher again with the 10-year German Bund trading at 2.32% on Tuesday compared to under 2% a few weeks ago and U.S. Treasuries at 3.6%. /US
Italy’s 10-year yield was up around 5 basis points on the day at 4.19%, leaving the closely-watched gap between Italy and German at around 185 bps.
“Sentiment in markets is dominated by central banks and the repricing of rates yet again,” Kerry Craig, JPMorgan Asset Management’s global market strategist, said.
“Equities have had a strong run since the start of the year so seeing an air pocket emerge now is no major surprise.”