A semblance of calm returned to markets on Wednesday after the carnage sparked by hotter-than-expected American inflation that prompted investors to reassess the outlook for interest rates and economic growth.
US equity-index futures rallied after shares had their biggest drop in more than two years Tuesday, with the S&P 500 falling more than 4 per cent and the Nasdaq 100 sliding more than 5 per cent. A gauge of the dollar retreated after jumping the most in three months on Tuesday. The 10-year Treasury yield ticked higher, hovering near a decade-peak.
“An easing in inflationary pressure later this year will allow the Fed to broaden its focus again in order to manage the economic slowdown. However, we are not there yet,” said Mathieu Racheter, head of equity strategy at Bank Julius Baer. “In the meantime, earnings estimates will likely continue to be adjusted downwards, while higher real rates keep valuations at bay. For now, we recommend staying defensively positioned.
The yen pulled back from a slide toward the key 145 level versus the dollar after a Nikkei report that the Bank of Japan conducted a so-called rate check with traders to see the price of the currency against the greenback. The finance minister warned he wouldn’t rule out any response if current trends continued. The country’s 10-year bond yield rose to 0.25 per cent, the upper end of the central bank’s policy band.
“Markets had tried desperately to spin a bull case and fight the Fed, basically, and that’s a dangerous place to be,” Carol Schleif, deputy chief investment officer at BMO Family Office said on Bloomberg TV. Looking further ahead, she pointed to “a great deal of fiscal stimulus on its way into the market to take some of the place of the monetary stimulus that’s being withdrawn.”
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