Morning Bid: Shockwaves, say no more

A look at the day ahead in markets from Dhara Ranasinghe

Central banks’ challenge — hiking interest rates to contain soaring inflation without wrecking their economies — has just got harder.

From stocks to crypto and emerging markets, risk assets are reeling from the likelihood of aggressive U.S. interest-rate increases that raise recession risks for the global economy.

Monday’s Wall Street Journal report, from a correspondent viewed as close to the Fed, flagged a hefty 75 basis-point hike and persuaded markets to further price in such a move for the Federal Reserve’s Tuesday-Wednesday meeting.

Chances of a such a move, the scale of which has not been seen since 1994, have grown since Friday’s red-hot inflation reading. It inflicted the worst day on two-year U.S. Treasury bonds since 2009 on Monday ; taken together with Friday’s post-CPI jump, yields rose around 54 bps, the biggest two-day move since just after the 2008 Lehman collapse, Deutsche Bank points out.

An inversion of Treasury yield curve, which typically is seen as a recession harbinger, kicked the S&P 500 (.SPX) almost 4% lower, while the tech-heavy Nasdaq (.IXIC) slid over 4.5%.

A semblance of relief has now crept in, lifting U.S. and European stock futures.

But be in no doubt that sentiment remains fragile. With a bear market confirmed for Wall Street, all the assets that benefited from an era of flush liquidity continue to suffer.

Crypto currencies Bitcoin and ether hit new 18-month lows on Tuesday while many emerging market currencies are at multi-year lows.

Due soon, the German ZEW survey could further fan growth worries if it shows a sharp decline in sentiment.

Focus remains very much on central banks – whether that’s what the European Central Bank’s Isabel Schnabel, speaking later on, says about containing fragmentation risks in the euro area, to just how the Fed will navigate the ructions in U.S. markets.

Key developments that should provide more direction to markets on Tuesday:

  • BOJ ramps up bond buying to defend yield cap, undermining jawboning
  • No let up in crypto slide as Celsius halt leaves investors ‘panicking’
  • UK unemployment rises in the three months to April.
  • JPMorgan European Insurance Conference
  • Final German CPI/HICP
  • U.S. May producer prices