The market turmoil sparked by last week’s round of central bank rate hikes receded further on Tuesday, as worries about a recession were put on hold while investors weighed the risks ahead of some key data and a congressional testimony by Fed Chair Jerome Powell. European stocks were headed for a second day of gains and Asian markets were mostly higher, with Wall Street futures also pointing to a solid open when US traders return from their long holiday weekend.
Equities stage a cautious rebound
Nothing much has changed since last week surrounding expectations about central bank tightening or signs that inflationary pressures may be moderating. Recession is still the foremost concern for investors, so this week’s rebound in equity markets looks more like a technical correction following the heavy selling over the course of the previous two weeks.
- Market panic continues to ease, stocks claw higher, but mood is subdued
- Euro and pound nudge up on ECB and BoE comments, RBA caps aussie gains
- Powell testimony and data awaited for more direction
The pause in the bond rout is also likely aiding sentiment as yields settle below the recent highs. The 10-year US Treasury yield came close to breaching 3.5% after the Fed hiked rates by a bigger-than-expected 75 basis points last Wednesday.
Plenty of risks ahead
Powell will be speaking before both chambers of Congress on Wednesday and Thursday and may signal that more aggressive rate increases will be needed to combat stubbornly high inflation. Crucial PMI data for June, as well as inflation numbers for the UK, Canada and Japan are due this week too. Hence, this may just be the calm before the next storm.
Aside from the anxiety around the pace of monetary tightening, investors also have to grapple with the threat of snap lockdowns in China amid new outbreaks in the south of the country, including the tech hub of Shenzhen.
Euro powers ahead, yen still in danger zone
In FX markets, safe havens were retreating and riskier currencies were recouping lost ground. The US dollar backed further away from last week’s two-decade peak against a basket of currencies and the yen and Swiss franc were weaker too. The greenback slipped versus the franc but held firm against the yen, which continued to hover dangerously around the 135 level.
Fresh lows for the yen seem more likely than not after the Bank of Japan refused to change its ultra-accommodative stance at its meeting last Friday. In contrast, the European Central Bank is getting ready to lift rates and Chief Economist Philip Lane signalled yesterday that although the size of the July rate hike is set at 25 bps, a bigger increase is possible in September if there are more upside surprises in inflation.
The euro was last trading up almost 0.5% to rise to around $1.0555. Some reassurances by President Christine Lagarde on Monday on the ECB’s determination to prevent fragmentation in the Eurozone bond market are also likely adding to the euro’s positive momentum.
Pound and aussie make progress too
The pound was up too, testing the $1.23 handle and drawing support from relatively hawkish remarks by the Bank of England’s Catherine Mann. Investors are sensing some inklings of a hawkish shift by the BoE and Mann was one of three MPC members that dissented to vote for a 50-bps hike.
Furthermore, both Mann and Chief Economist Huw Pill, who spoke earlier today, have cited the exchange rate as a cause for concern when it comes to the inflation risks.
The Australian dollar was another strong gainer, though it lagged the Canadian dollar, which was today’s biggest winner, firming to around C$1.2910 ahead of domestic retail sales figures expected later today. The aussie, meanwhile, along with the kiwi, was benefiting from the improved risk sentiment. But its advances were capped by RBA Governor Philip Lowe, who played down the prospect of rate rises bigger than 50 bps in a speech earlier today.