Stocks rally, Treasury yields rise after Fed hikes rates 75 basis points

  • US stocks extend rally after Fed hikes rates 75 basis points
  • Fed’s Powell: Most Likely Another 50-75bp Rate Hike in July
  • European markets cut gains after ECB emergency meeting

NEW YORK, June 15 (Reuters) – Global stocks rallied and government bond yields and the dollar fell on Wednesday from multi-year highs as investors applauded the Federal Reserve’s decision to raise interest rates. interest of three quarters of a percentage point, the largest increase. since 1994.

Investors seemed relieved that the U.S. central bank had met market expectations that it would act aggressively to rein in soaring inflation, and for now seemed comfortable with the Fed’s projection that the he economy is expected to slow over the next two years.

Minutes after the market’s widely predicted rate hike, stocks initially pared gains as investors worried about the prospect of tighter monetary policy tipping the economy into a recession.

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But by late afternoon in New York, investors had put aside concerns about growth and instead believed that the economy would be better off in the long run if the Fed managed to get prices under control now.

The Dow Jones Industrial Average (.DJI) ended the session jumping 1%. The S&P 500 (.SPX) jumped 1.46% and the Nasdaq Composite (.IXIC) 2.5%.

The momentum was reflected in global equities. The MSCI gauge for stocks across the world (.MIWD00000PUS) also climbed 1.10%, after hitting its lowest level in about a year and a half earlier this week.

“Today’s decision by the Fed to move faster toward neutral will be applauded over the long term by the economy, trade policymakers and, ultimately, markets,” said Rick Rieder, chief financial officer. Global Fixed Income Investments and Head of Global Market. Blackrock’s allocation investment team.

Market relief that the Fed delivered what it expected extended to Treasuries.

The yield on the benchmark 10-year Treasuries fell back to 3.291%, down from the 11-year high of 3.498% hit on Tuesday. The yield on two-year Treasury bills also slipped to 3.2096%, well below Tuesday’s high of 3.456%, a level last seen in 2007.

At a press conference after the rate hike, Fed Chairman Jerome Powell said a rate hike of 50 or 75 basis points at his next policy meeting in July seemed most likely and that the economy was strong enough to handle tighter policy.

“Whether or not we can escape it without a recession is in question,” said Ellen Hazen, chief market strategist at FLPutnam Investment Management in Massachusetts.

“The runway for them to have a soft landing just got shorter and narrower, which means they’re expecting higher inflation, they’re expecting higher unemployment, they’re expecting lower GDP (gross domestic product ),” Hazen said.

ECB SURPRISE

Concerns about rising borrowing costs and global inflation rocked financial markets throughout the year.

Global equities are down more than 20%, bond markets have been thrown into disarray and fears that drastic action by the Fed could tip the world into a recession mean that subsequent Fed actions will be crucial for traders.

But global stocks and bonds had rallied ahead of the Fed meeting on Wednesday, buoyed by a surprise announcement from the European Central Bank (ECB) that it would seek to avoid a debt crisis due to the rise borrowing costs by supporting heavily indebted Member States, and designing a new risk management tool. Read more

Although some investors felt the measures proposed by the ECB were not bold enough, European stocks surged and government bond yields in countries such as Italy, Spain and Portugal – which will benefit ECB plans – have receded.

The yield on Italian 10-year bonds, which stands to benefit the most from the ECB’s plans, was last down to 3.91%, above its session low of 3.799%. Spanish and Portuguese 10-year yields also came off their lows of the day, but were still down sharply on the day. , .

Since many US borrowing rates are linked to yields, financial conditions there have already tightened significantly even before the Fed hikes.

ECB chief Christine Lagarde on Wednesday tried to lower expectations about what the European Central Bank should do to avoid a debt crisis, arguing that the ECB’s job is to control inflation, not to help budgets.

“We cannot give in to fiscal domination,” Lagarde told a forum in London. “We also cannot give in to financial domination; we must fulfill our mandate.” Read more

With Wednesday’s Fed rate hike already priced in by the market, the dollar index took a breather after hitting a 20-year high of 105.79 earlier in the day. By early evening, it was down 0.40%. This helped the euro pare its initial losses to hold steady at $1.04205.

Eurozone returns

Gold, which took a hammer blow from inflation and a sky-high dollar, rose as a weaker dollar and a pullback in Treasury yields gave it a reprieve. It jumped 1.4% to $1,830.31 an ounce on the back of higher US rates.

Oil was an outlier and prices fell as investors feared the Fed’s aggressive tightening would depress demand.

Oil prices fell after the Organization of the Petroleum Exporting Countries (OPEC) stuck to its forecast that global oil demand will exceed pre-pandemic levels in 2022.

Brent crude futures for August settled down $2.66, or 2.2%, to $118.51 a barrel, after falling to $117.75.

U.S. West Texas Intermediate crude for July settled up $3.62, or 3.04%, at $115.31 a barrel, after falling to a low of $114.60.

Global stocks have the worst start to the year on a recent record
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Reporting by Marc Jones in London and Wayne Cole in Sydney; Additional reporting by Saikat Chatterjee; Editing by Gareth Jones, Jonathan Oatis and Lisa Shumaker

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