Stocks in Europe rebounded on Tuesday along with US equity futures, and Treasuries snapped a four-day selloff as sentiment steadied after a market rout driven by expectations of sharper Federal Reserve interest-rate hikes to fight inflation.
The Stoxx Europe 600 index climbed about 0.9% at the open, with banks and technology shares leading a broad-based advance. S&P 500 Nasdaq 100 contracts jumped more than 1%, signaling some relief after Monday’s rout that erased $1.3 trillion in market capitalization. The dollar dipped from a two-year high and Treasuries made gains, though the yield curve remained inverted, underscoring worries about an economic downturn sparked by tighter monetary policy.
This quarter is set to deliver the biggest combined loss for global bonds and stocks on record, in data going back to 1990. The highest inflation in a generation, stoked by supply-chain and commodity-market disruptions amid China’s Covid struggles and the war in Ukraine, is roiling the outlook. The big question is whether the Fed and other major central banks will tip their economies into recession as they tighten financial conditions.
“It’s clear that the Fed put is over,” Ellen Hazen, chief market strategist at F.L.Putnam Investment Management, said on Bloomberg Television. “What you are seeing is that real rates are going up as well as nominal and what that means is that this era of easy money that we’ve seen for the last decade and a half with real rates very, very low or negative is coming to an end.”
Traders now see about 200 basis points of tightening by the Fed’s September decision and the possibility of a 75 basis-point hike. They expect the overnight rate to peak at 4% by mid-2023. Bets on an outsize Fed move hardened following a Wall Street Journal report suggesting the larger increment was now in play. Some commentators even floated the idea of a 100 basis-point hike.
Speculative investments have suffered in the risk-asset selloff. Bitcoin slid as much as 10% to around $21,000 before paring most of the retreat.
In Japan, the central bank boosted bond-purchase operations to keep yields in check. The yen dipped and was near a 24-year low against the greenback.
On the commodity front, oil held above $120 a barrel as investors evaluated a tight supply outlook and the impact of China’s eventual return from virus curbs.