LONDON (Reuters) – Stocks rose and euro zone bond yields tumbled on Tuesday as investors took a breather ahead of the next round of potentially bleak inflation data while also toying with concerns about Europe’s energy crisis, a looming recession and more interest rate hikes.
The STOXX Pan-European Index (.STOXX), MSCI’s broadest index of Asia-Pacific stocks outside Japan (.Powell, rose at the Jackson Hole conference last week.
Eurozone government bond yields fell as markets calmed after a dramatic action on Monday when European Central Bank Governing Council member Isabel Schnabel’s warning about rising inflation sent bond yields up 12-20 basis points.
Register now to get free unlimited access to Reuters.com
Global markets are very sensitive to such upbeat comments from key policy makers at the moment, as they hope a policy shift to looser ones that may ease the bleak economic outlook for the eurozone.
The 10-year yield in Germany was last traded at 1.443%, down 5 basis points on the day but close to a two-month high of 1.548% on Monday.
While markets paused for breath on Tuesday, longer-term concerns remain as policy makers struggle to contain rising prices around the world with interest rate hikes that could exacerbate the economic pain.
“One thing is clear: A recession in Europe appears inevitable, and the only question is how long and how severe it will be,” Frederic Ducruzette and Axel Rosrens of Pictet Wealth Management wrote on Tuesday.
However, emerging market currencies and stocks assessed the relative absence of new bad economic news and data on Tuesday to post a modest recovery from recent lows.
The South African rand rose 0.5% as did the Mexican peso, while the Indonesian rupiah and the Indian rupee led the gains in Asia.
forced labor
At the Jackson Hole conference, Fed Powell and ECB spokespeople signaled the need for aggressive action to tackle inflation, which led to a sell-off in bonds and stocks, as traders raised near-term interest rate expectations.
“Investors looking for a market rescue from the Fed’s fulcrum didn’t get it at the Federal Reserve’s roadshow in Jackson Hole,” said Jason Darrow, Head of Asset Allocation for the Americas at UBS Global Wealth Management.
“Instead, investors should expect a market system characterized by high volatility and range-bound trading to last much longer.”
Futures markets have a two-thirds better odds that the European Central Bank will raise rates by 75 basis points in September, and see about a 70% chance that the Fed will do the same.
US non-farm payrolls data is due on Friday, and markets may not want a strong number if it supports the basis for continued sharp interest rate hikes.
Before that, German inflation figures at 1200 GMT on Tuesday and the Chinese manufacturing survey due on Wednesday will be closely watched.
US Treasuries settled on Tuesday morning. The two-year yield fell to 3.4048%, after rising to 3.489% on Monday, the highest level since late 2007.
The benchmark 10-year bond yield also fell to 3.0596%, down from 3.13% on Monday.
The US dollar stabilized after falling overnight, although the euro was trying to restore parity, aided by European Central Bank bets on price hikes and lower gas prices.
The dollar index, which measures the value of a currency against a basket of peers, fell to 108.45, not far from a two-decade high of 109.48 hit the previous day. The dollar traded at $0.9999 per euro and bought 138.52 yen.
The euro will be tested by upcoming eurozone inflation numbers, US jobs data, and Russian cuts to gas flows later in the week, said Rodrigo Cattrell, a strategist at National Australia Bank.
“The European story is really about the economic outlook…no energy means no growth,” he said, adding that it would not be surprising if the euro fell back to $0.96.
Oil prices fell amid concerns that the weakness of global economies caused by inflation would soften demand for fuel, and Iraq’s crude oil exports were not affected by the clashes there.
Brent crude futures for October were down $4, or 3.83 percent, at $101.07 a barrel by 1122 GMT, after rising 4.1 percent on Monday, the biggest increase in more than a month. Read more
Gold prices eased slightly as the precious metal continued to wilt in the face of a stronger dollar, with spot gold last trading at $1733.69 an ounce.
Register now to get free unlimited access to Reuters.com
Additional reporting by Shi Yu; Editing by Stephen Coates, Gareth Jones and Thomas Janowski
Our Standards: Thomson Reuters Trust Principles.