Sydney, April 11 (BNA): Stocks tumbled and bond yields surged on Monday amid heightened caution in the markets ahead of central bank meetings and US inflation data, while the euro only managed to make short gains on the back of relief from the far-right not winning the first round. French presidential elections.
French leader Emmanuel Macron and his rival Marine Le Pen qualified on Sunday for what he promised to run in the April 24 presidential run-off, Reuters reports.
A Le Pen victory could send shock waves through France and Europe in ways similar to Britain’s 2016 vote to leave the European Union. The first round result was close enough to leave the Euro barely changing at $1.0883, after the initial rally to $1.950.
The mood in stock markets was cautious, with MSCI’s broadest index of Asia Pacific shares outside Japan down 1.3%.
Japan’s Nikkei fell 0.7%, after losing 2.6% last week, while China’s blue-chip stocks lost 2.4%.
S&P 500 stock futures fell 0.6% and Nasdaq 0.7%. EUROSTOXX 50 futures lost 0.8%, FTSE futures lost 0.4%.
Earnings season begins this week, and JP Morgan, Wells Fargo, Citi, Goldman Sachs and Morgan Stanley are all due to be announced.
So far, Wall Street has done surprisingly well in the face of a aggressive sell-off in bonds that saw 10-year Treasury yields rise by 31 basis points last week.
Yields finally rose to a three-year high of 2.77%, topping Chinese bond yields for the first time since 2010.
Markets raced to price the risks of further interest rate increases from the Federal Reserve with futures rising 50 basis points at the May and June meetings.
US Economist Ethan Harris at Bank of America forecasts a half point rise at each of the next three meetings and a session peak around 3.25-3.50%.
“If inflation appears to be heading below 3%, our current call should be tough enough,” Harris said in a note. “Conversely, if inflation stops above 3%, the Fed will have to pick up until growth drops near zero, which could trigger a recession.”
European Central Bank Inflation Tests
All of this underscores the importance of the US consumer price report for March on Tuesday as it forecasts an average stratospheric rise of 1.2%, bringing annual inflation to 8.5%.
China’s inflation figures surprised their rise on Monday and, while they were relatively modest at 1.5% y/y in March, still undermined hopes for strong policy easing from Beijing. Read more
Inflation will also be front and center at Thursday’s ECB meeting as the risk lies in a hawkish bias for the statement.
Analysts at TD Securities noted that “inflation has jumped much higher than the European Central Bank thought it would be just a month ago.” We expect a dramatic turnaround from the European Central Bank, with an early end to quantitative easing in May and the basis for, but not fully committed, laying the groundwork for the June rally.”
Continuing the tightening theme, the central banks of Canada and New Zealand could raise interest rates by 50 basis points in their policy meetings this week.
The massive rise in Treasury yields sent the Dollar Index to the top 100 for the first time since May 2020, and it last traded at 99.858.
The main loser was the yen as the Bank of Japan remains dedicated to maintaining its ultra-loose policy and bond yields near zero. The dollar rose to 124.92 yen, after climbing 1.5% last week below its recent high of 125.10.
In commodity markets, thermal coal was the standout winner last week, up nearly 13% after the European Union banned imports of Russian coal.
Gold managed a weekly gain of 1.1% but was undermined by the massive rise in bond yields and last settled at $1,942 an ounce.
Oil prices remained under pressure after global consumers announced plans to release crude from strategic stocks and as Chinese lockdowns continued.
Early Monday, Brent crude fell $2.05 to $100.73, while US crude lost $2.10 to $96.16.