Wall Street stocks rose and a powerful rally in debt markets reversed on Wednesday, as Federal Reserve chair Jay Powell signalled that the US central bank would raise interest rates this month despite economic uncertainty created by Russia’s invasion of Ukraine.
The S&P 500 share index ended the day 1.9 per cent higher, and the technology-heavy Nasdaq Composite rose 1.6 per cent. In Europe, the regional Stoxx 600 equity benchmark added 0.9 per cent.
The equity moves came as Brent crude oil climbed 7.6 per cent to $112.93 a barrel; Joe Biden, US president, hinted at further sanctions against Russia; European natural gas prices hit an all-time high; and data showed that eurozone inflation had surged to a new record.
Powell told US legislators on Wednesday that he still saw interest rate rises coming, starting with a 0.25 percentage point increase in March, but that the Ukraine conflict had injected “uncertainty” into the Fed’s outlook.
The two-year US Treasury yield, which closely tracks monetary policy expectations, rose 0.19 percentage points to 1.53 per cent, fully reversing the previous session’s drop, as traders accepted that the Fed would proceed with its intended monetary tightening to tamp down inflation. Bond yields move inversely to their prices.
As Powell spoke, investors reasserted bets on that aggressive tightening. Futures markets earlier this week cut the number of quarter-point interest rate increases expected this year from between six and seven to between four and five because of the conflict in Ukraine. But that shifted as Powell spoke, when nearly six quarter-point rises were once again priced in.
The 10-year US Treasury yield, which underpins borrowing costs worldwide, rose 0.17 percentage points to 1.90 per cent, reversing some of this week’s move lower. Investors seeking out high-quality assets, perceived to be lower risk, had bought up the benchmark debt instrument earlier this week.
The rise in the 10-year yield was slower than that on the two-year yield, marking a so-called flattening of the yield curve, an indication that the market is expecting growth to slow as borrowing costs rise.
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Meanwhile, futures linked to TTF, Europe’s wholesale natural gas price, rose more than 50 per cent on Wednesday to as much as €185 per megawatt hour, later trimming some of their gains.
The latest increases for oil came as big energy consumers boycotted Russian crude following Moscow’s invasion of Ukraine. The Opec alliance on Wednesday resisted calls to boost output.
Biden has come under mounting pressure to ban Russian oil imports, with Republicans and Democrats calling on him to cut off energy ties with the Kremlin. In his State of the Union speech on Tuesday, Biden voiced support for punitive measures against Russia but stressed that getting prices under control was his “highest priority”.
“Brent crude is the biggest fear factor for equity markets,” said Maarten Geerdink, head of European equities at Dutch investment house NN Partners. “If it goes ballistic and moves towards $150 or more a barrel, then [economic] growth really gets hammered.”
Russia’s central bank said that the Moscow stock exchange, which did not open for trading on Monday, would remain closed on Wednesday.