Marketmind: Bond squeeze eases as focus shifts to Middle East war
Investors’ attention turns to Middle East tensions
After a busy week of economic and corporate updates and a surge in bond yields, global markets are now shifting their focus to the ongoing conflict in the Middle East. The seemingly endless rise in long-term U.S. Treasury yields has been a central concern, with 10-year borrowing rates coming close to 5% for the first time in 16 years. The strength of the U.S. economy, along with positive corporate earnings, has contributed to this surge. However, uncertainties surrounding the speakerless Congress and the potential impact of rising market interest rates have left the bond market feeling apprehensive.
Fed’s Powell raises uncertainty about future actions
Investors looked to Federal Reserve Chairman Jerome Powell for guidance on the central bank’s next moves. However, Powell’s comments on the economy’s strength and the need for tighter borrowing conditions were met with some disappointment. The decision on whether to hike rates again has been delayed for at least a couple of months, according to Powell and his deputies. Despite this, implied Fed policy rates in the futures market and two-year Treasury yields eased back, while 10-year yields remained high. This hesitation from the Fed, coupled with the strong economy, may result in a longer period of tight borrowing conditions than initially expected.
Market reactions and concerns
The yield curve has further disinverted, showing the lowest gap between two and 10-year yields in a year. Additionally, worries about fiscal policy and debt supply have caused the term premium on long-term maturities to rise. As another weekend of the Israel-Gaza conflict approaches, investors have turned to short-term safety hedges, leading to a pullback in 10-year Treasuries, a bid to oil prices, and a surge in gold prices.
Implications for global markets
Wall Street futures remained in the red following heavy losses on Thursday, and the volatility gauge reached its highest level since March. The dollar remained strong, potentially prompting Bank of Japan intervention. Chinese, Asian, and European stocks all experienced significant declines. In Europe, L’Oreal shares dropped 3% after missing expectations for a strong rebound in China.
Key developments for U.S. markets
- American Express, Comerica, Huntington Bancshares, Regions Financial, Interpublic, and Schlumberger will report corporate earnings.
- Cleveland Federal Reserve President Loretta Mester and Philadelphia Fed President Patrick Harker are scheduled to speak.
- A U.S.-EU summit will take place in Washington, with President Joe Biden meeting with Charles Michel and Ursula von der Leyen.
Mike Dolan
Email: mike.dolan@thomsonreuters.com
Twitter: @reutersMikeD
