Stocks, Bonds Drop as Hawkish Fed Dents Sentiment: Markets Wrap
- Fed’s Brainard says bank to shrink balance sheet at rapid pace
- Treasuries extend rout, Asia-Pacific share gauge down over 1%
Stocks and bonds declined Wednesday on the prospect of a swift reduction in the Federal Reserve’s debt holdings as part of a stepped up campaign of monetary tightening to tackle high inflation.
An Asia-Pacific share index fell over 1%, dragged down by Japan and Hong Kong as the latter reopened after a holiday. U.S and European futures wavered, following a drop in Wall Street shares led by the technology sector.
Treasuries extended a slump, pushing the 10-year yield past 2.60% to the highest level since 2019. Bonds in Australia and New Zealand also tumbled. A gauge of the dollar’s strength was near a three-week peak.
Fed Governor Lael Brainard said Tuesday curbing inflation is “paramount,” adding the central bank may start trimming its balance sheet rapidly as soon as May. Investors fear that a more restrictive U.S. central bank could end up tipping the world’s largest economy into a downturn, or even a recession.
Oil was steady at about $102 a barrel. Worries remain that Russia’s growing isolation over the war in Ukraine may further disrupt commodity flows. Fresh sanctions on Russia are expected, including a U.S. ban on investment in the country and a European Union proscription on coal imports.
Brainard’s comments put the spotlight even more firmly on the Fed meeting minutes due later Wednesday, which are expected to provide clues about the pace of both interest-rate hikes and so-called quantitative tightening, the process of shrinking the central bank’s bond holdings.
“The key risk for Wall Street-correlated world stock markets remains the Federal Reserve tightening cycle,” Christopher Wood, global head of equity strategy at Jefferies LLC, wrote in a note. Quantitative tightening alongside rate rises may have a more rapid impact given current debt levels, he said.
Markets signal a half-point Fed rate increase is on the cards at next month’s policy meeting. At the same time, price pressures show little sign of abating as war stokes already elevated raw-material costs.
“The Ukraine crisis is nowhere near to being resolved,” Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets LLC, said on Bloomberg Television. “And then we’re heading into earnings season. Volatility levels are probably too low and will start to pick up.”
Meanwhile, the latest data from China indicated that activity in its services industry contracted in March amid mobility curbs to stem a Covid outbreak.
- Where is the dollar headed next? How will the composition of FX reserves change? Those are the themes of this week’s MLIV survey. Please click here to participate.