Stocks, bonds groggy after the rout; wide-eyed at the Fed

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NEW YORK – Global stocks and bonds swirled in choppy trading on Tuesday after the market rout the day before, as investors braced for a hike in U.S. interest rates this week that could be the biggest in 28 years old.

Surprisingly strong US inflation data released last Friday fueled bets that the Federal Reserve would have to tighten monetary policy more aggressively to rein in soaring prices. Fears that the tightening could trigger a recession weighed on global stocks and government bonds on Monday.

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Investors are now betting with near certainty that the Fed will announce a 75 basis point rate hike – the biggest since November 1994 – at the end of its two-day policy meeting on Wednesday.

“This is the meeting everyone has on their radar. … And the market will hang on every word Fed Chairman Jerome Powell has to say,” said Chris Weston, head of research at Pepperstone Group Ltd, a forex broker in Australia. “The market wants answers on its commitment to crush inflation.”

In early afternoon New York, the Dow Jones Industrial Average was flat, the S&P 500 was up 0.21% and the Nasdaq Composite was up 0.9%.

The MSCI gauge of global stocks fell 0.25% to levels last seen in November 2020, while a pan-European stock index fell 1.26% to March 2020 lows .

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Underlining US rate hike expectations, two-year Treasury yields hit 3.430%, the highest level since November 2007, while 10-year Treasury yields hit an 11-year high of 3.4620% .

Markets are now seeing the Fed’s rate hike cycle peak around 4%, down from the 3% seen last month.

Eurozone government bond yields also hit multi-year highs as spreads between core and periphery widened amid concerns about accelerating central bank monetary tightening.

Investors’ revaluation of higher rates sent down assets that benefited from rock bottom interest rates, including equities, cryptocurrencies, junk bonds and emerging markets.

Monday’s selloff pushed the S&P 500 index into a bear market, with the index falling more than 20% from its January 3 closing high.

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“Quite simply, when we see monetary tightening in the order of what we see globally, something is going to snap,” said Timothy Graf, head of EMEA macro strategy at State Street.

“Equity markets are reflecting the reality of the first-order effect of tightening financial conditions,” Graf said, predicting that with US equity valuations still above COVID-era lows, there is more pain to come.

“I think there are other shoes to drop,” he said.

MSCI’s broadest index of Asia-Pacific stocks outside Japan closed 0.59% lower, trailing losses on Wall Street, while Japan’s Nikkei lost 1.32%.

Crypto markets, where bitcoin and ether hovered near 18-month lows, were also rattled by interest rate expectations and crypto lender Celsius Network’s decision to freeze withdrawals.

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Bitcoin, which fell as low as $20,816, rallied back to $22,599 on Tuesday.

Brent crude futures rose 0.2% to $122.5 a barrel, supported by expectations that supply will remain tight.

State Street’s Graf did not see a recession as inevitable, but said “monetary tightening and the squeeze on real incomes from commodity prices means the likelihood has increased.”

Rising yields and flight from risk helped the dollar hit a 20-year high against a basket of currencies.

The dollar index, which measures the greenback against a basket of six major currencies, rose 0.2% after hitting a high of 105.46.

A strong dollar pinned the euro near a one-month low of $1.04225 and pressured the yen, which languished near a 24-year low of 134.94 against the dollar. .

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With the Bank of Japan expanding its bond buying on Tuesday and unlikely to back away from its ultra-low rate policy at its meeting on Friday, respite for the yen seems unlikely.

“Given that Wednesday could see the Fed hit 75 basis points and signal more, while the BOJ on Friday will only signal more bond buying, the yen won’t stay at these levels for long. It’s going to get worse,” said Rabobank strategist Michael Every.

A strong dollar and rising yields weighed on gold. Spot gold slipped 0.4% to 1,811.40 an ounce.

(Reporting by Sujata Rao; Additional reporting by Scott Murdoch and Alun John in Hong Kong; Editing by Alex Richardson, Mark Heinrich and Leslie Adler)

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