The Hang Seng index in Hong Kong rose 1.4% to 17,919, while Japan’s Nikkei 225 climbed 0.6% to 31,936. Gains were seen across the region, with South Korea’s Kospi index jumping 2% on the back of Samsung’s improved earnings report.
U.S. futures slipped slightly a day after the S&P 500 rose 0.5% to 4,358. The Dow Jones added 0.4% to 33,739, and the tech-heavy Nasdaq gained 0.6% to 13,562. Strong quarterly results from PepsiCo boosted sentiment.
The main action was in the Treasury market, where yields fell as trading resumed following a holiday. The yield on the benchmark 10-year Treasury note dropped to 4.64% from 4.80% on Friday. This marked a substantial shift for the bond market and the first chance for yields to move since surprise weekend attacks in Israel unsettled global markets.
“The drop provided some relief after yields recently hit decade highs following aggressive Fed rate hikes aimed at taming inflation,” said Michael Brown, senior market analyst at Caxton FX. “Stocks swung from losses to gains Monday as traders interpreted dovish comments by Fed officials as signalling a potential pause in rate rises.”
The policy-sensitive 2-year Treasury yield also declined sharply, sinking below 5% to 4.97% from 5.09% previously. Yields have surged on expectations the Fed will keep interest rates elevated for longer to combat stubbornly high inflation. This has dragged on stocks and raised concerns that sharply higher long-term borrowing costs will drive the U.S. into recession.
But the speed of the backup in yields may have gotten ahead of itself. “The rapid climb in the 10-year yield likely doesn’t fully reflect fundamentals and may unwind as recession fears overtake inflation worries,” Brown said.
Traders are now pricing in only a 27% probability that the Fed raises its benchmark rate again this year, down from 47% a week ago, according to CME Group data. “This reflects building hopes that inflation has peaked and rates may not need to rise as high as previously thought,” Brown said.
Elevated rates have flowed through to mortgages, with the average 30-year fixed home loan topping 7% for the first time since 2002. But moderating yields could provide some respite to strained housing affordability after the Fed’s aggressive tightening campaign.
Markets are hyper-sensitive to signals from the central bank as investors try to position for a Fed pivot. “Comments from officials on Monday fed growing anticipation that rates could rise more slowly going forward or even pause soon,” said Edward Moya, senior market analyst at Oanda.
This supported the equity market rally despite lingering growth concerns. “Stocks found a firmer footing as earnings help calm recession fears,” Moya said. Dow component Coca-Cola and industrial giant Johnson & Johnson both posted forecast beats.
Still, the backdrop remains challenging. “Geopolitical tensions, inflation pressures, and recession worries all argue that the bear market is not over,” Moya cautioned.
In energy markets, oil prices were little changed near $86 a barrel following Tuesday’s drop. Lingering demand worries offset tighter supplies amid the Russia-Ukraine war. OPEC’s reduction in output targets also provided some support.
Meanwhile, the U.S. dollar index ticked higher against a basket of currencies. The greenback hit a fresh 32-year peak against the yen, rising to nearly 149. The euro slipped slightly to $1.06.
Soaring energy costs and broad inflation are threatening growth across the globe, but especially in Europe as the region heads toward winter. “This will keep upward pressure on the dollar as the Fed maintains an aggressive tightening stance compared to other central banks,” Brown said.
Markets await key U.S. inflation data Thursday that may influence the Fed outlook. “The CPI report will help determine whether a pivot is imminent or still some way out,” Moya said.
Investors seem to hope the worst is over for stocks as bond yields ease back. But with the Fed resolute on curbing price increases, recession fears linger. The path ahead is treacherous.
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