Selloff Deepens as BOE in Focus After Fed Warning: Markets Wrap

Selloff Deepens as BOE in Focus After Fed Warning: Markets Wrap

(Bloomberg) — Stocks and bonds fell as Jerome Powell’s warning that the Federal Reserve would raise interest rates more than previously anticipated sapped risk appetite. The dollar gained.

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Futures on the S&P 500 fell 0.7% in the wake of Wednesday’s 2.5% drop. The selloff spread to Europe and Asia, where China’s affirmation of its Covid-Zero stance dashed hopes of a reopening. Moderna Inc., Qualcomm Inc. and Roku Inc. declined in premarket trading, while Etsy Inc. and EBay Inc. rose.

The Fed’s 75 basis-point increase is likely to be followed by a similar-sized hike from the Bank of England later on Thursday, though rates there are potentially limited by the risk of a severe recession. Powell disappointed traders betting on a pivot as the US economy remains resilient to stubbornly high inflation.

“Every time the market gets a little bit of dovish hope, it gets smacked on the nose with a rolled up newspaper,” said Scott Rundell, chief investment officer at Mutual Ltd. “There’s a lot of volatility still ahead.”

Investors are concerned about the impact of central bank tightening on economic growth, and Powell left little doubt that he’s prepared to push rates as high as needed to stamp out inflation. European Central Bank President Christine Lagarde warned on Thursday that a “mild recession” is possible but that it wouldn’t be sufficient in itself to stem soaring prices.

The dollar gained as investors looked toward US jobs data, which may help to determine the pace of upcoming rate hikes. The pound fell more than 1% as concern mounted that a smaller-than-expected BOE hike could compound sterling’s drop, while Norway’s krone fell after its central bank delivered the smallest increase in its benchmark rate since June.

“There is likely some profit taking in long dollar positions after the big moves post the FOMC meeting outcome and Powell’s press conference,” said David Forrester, a senior FX strategist at Credit Agricole CIB in Hong Kong.

Global bonds tumbled on Thursday in the wake of the Fed meeting. Two-year Treasury yields rose to 4.71%, but they’re still below the 5.06% peak in yields priced into Fed funds futures.

“Factoring in the bond market’s assessment, markets are becoming increasingly convinced that the path toward the terminal rate will include a recession,” said Quincy Krosby, chief global strategist at LPL Financial.

Wheat prices fell after Russia agreed to resume a deal allowing safe passage of Ukrainian crop exports. Oil dropped after Powell’s comments on interest rates overshadowed tightening supply.

Key events this week:

  • Bank of England rate decision, Thursday

  • US factory orders, durable goods, trade, initial jobless claims, ISM services index, Thursday

  • US nonfarm payrolls, unemployment, Friday

Some of the main moves in markets:

Inventory

  • Futures on the S&P 500 fell 0.7% as of 7:15 am New York time

  • Futures on the Nasdaq 100 fell 0.9%

  • Futures on the Dow Jones Industrial Average fell 0.5%

  • The Stoxx Europe 600 fell 1.2%

  • The MSCI World index fell 1.6%

Currencies

  • The Bloomberg Dollar Spot Index pink 0.6%

  • The euro fell 0.8% to $0.9744

  • The British pound fell 1.1% to $1.1261

  • The Japanese yen fell 0.2% to 148.21 per dollar

Cryptocurrencies

  • Bitcoin pink 0.4% to $20,249.94

  • Pink ether 2% to $1,541.44

Leaps

  • The yield on 10-year Treasuries advanced nine basis points to 4.19%

  • Germany’s 10-year yield advanced 10 basis points to 2.24%

  • Britain’s 10-year yield advanced six basis points to 3.46%

Commodities

  • West Texas Intermediate crude fell 1.5% to $88.64 a barrel

  • Gold futures fell 1.6% to $1,623.70 an ounce

–With assistance from Richard Henderson.

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