Global shares shake off inflation blues in volatile trade ahead of US consumer price data

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US inflation data due this week should cement interest rate views.

  • Global shares rose Tuesday, shaking off the previous day’s weakness, as investors prepared for US inflation data.
  • Bond yields steadied around their highest since before the pandemic, with those on German debt about to turn positive. 
  • Federal Reserve Chair Jerome Powell takes questions from lawmakers today, and investors will scour his responses.

Global shares rose Tuesday, bouncing back from weakness the previous day that was driven by concerns over the impact of rising interest rates and inflation on risk assets.

The MSCI All-World index was up 0.2%, having fallen to a three-week low Monday as another pickup in government bond yields rattled investor risk appetite, undermining stocks and cryptocurrencies in particular.

US stock futures rallied, with those on the S&P 500 and Dow Jones gaining around 0.4% and 0.3%, respectively. Those on the Nasdaq 100 rose almost 0.7%, taking their lead from a more upbeat tone in Asia overnight. 

Investors will track Federal Reserve Chair Jerome Powell’s testimony at his Senate confirmation hearing later in the day for signals on the tone and path of policy.

US inflation data for December due Wednesday could be key in cementing expectations for three, or even four, rate hikes this year. The Fed, having raced to stoke inflation last year, is now racing to contain it.

A boom in economic activity — coupled with a deficit of some raw materials, supply-chain bottlenecks and shortage of workers after the pandemic — has lifted US consumer inflation to its highest rate in 40 years. 

The coronavirus crisis rages on, with the Omicron variant fuelling a record 1.35 million cases in a day in the US alone on Monday.

But longer term, strategists and asset managers are not so pessimistic. 

“We view the recent equity volatility as an adjustment to the Fed’s incrementally more hawkish stance, rather than a sign that the Fed is about to bring the recovery and the equity rally abruptly to an end,” UBS Global Wealth Management’s investing chief, Mark Haefele, said in a note.

“We now expect three Fed rate hikes this year, starting as soon as March,” he said.

Elsewhere, the MSCI Asia Ex-Japan index rose 0.3%, reflecting strength in Korean and Indian blue-chips. 

In Europe, the Stoxx 600 bucked the trend early Tuesday, dropping 0.4% as losses in retail, travel and banking stocks offset gains in technology and healthcare. 

The relentless rise in bond yields in recent weeks has hit more-expensive equity sectors hard, particularly growth stocks such as tech. Benchmark 10-year Treasurys are around their highest since before the pandemic, as investors ditch assets likely to be hurt by rising interest rates.

The yield on the US 10-year note — last down 3 basis points on the day at 1.753% — is up 15 basis points in almost as many days. Meanwhile, yields on 10-year German Bunds are set to turn positive after almost three years in negative territory. 

“What is interesting is that, unusually, bonds and equities are trading in line with each other, as both assets sell off brutally,” Caxton market strategist Michael Brown said.

“We have yet to see any haven demand emerge for Treasuries, with bond markets continuing to reprice the FOMC outlook, rather than behaving as a safe haven,” he said.

Federal Open Market Committee minutes last week showed the US central bank is adopting a far more aggressive approach to tackling inflation than expected. 

However, some analysts said investors may have overreacted to the prospect of a more hawkish Fed, which may struggle to raise rates more than three times.

“As such, I do believe we may be approaching ‘peak Fed-fear’ for now. That could see a sharp jump for equities, a retreat by US yields and the US dollar,” OANDA strategist Jeffrey Halley said.

“The first move the market throws the kitchen sink at is usually the wrong one, always fade January.”

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