Equities creep to five-week highs, ignore bond selloff

By Saikat Chatterjee and Tommy Wilkes

LONDON (Reuters) -World stocks climbed to five-week highs on Wednesday as investors ignored a broadening selloff in global bond markets fuelled by a combination of soaring inflation and hawkish comments from U.S. policymakers.

Two-year U.S. Treasury yields are up 70 bps so far in March and set for their biggest monthly jump since 2004. But investors have been relatively sanguine about the implications of higher yields on stock market valuations, with many choosing to buy back in after a bruising few months for equity prices.

MSCI’s broadest gauge of world stocks rose 0.2% to a Feb. 17 high, a level last seen days before Russia invaded Ukraine. An Asian gauge rose 0.7% to its highest since early March.

European stocks also gained, with a pan-European equity benchmark hitting a new 1-month high in early London trading before they fell back as traders took profits.

U.S. stock futures signalled some weakness on Wall Street when it opens.

“It is almost as if the negative impacts of inflation, rising interest rates and the uncertainties of war are no longer of concern,” said Stuart Cole, head macro economist at Equiti Capital, who added that investors were focusing on stocks that could withstand the high inflationary environment.

Technology shares, which have had an inverse correlation with higher interest rates in the past, were the biggest drivers of broader market gains, with a Hong Kong gauge of technology stocks rising to a three-week high.

In Asia, battered e-commerce giant Alibaba, which recently expanded a buyback programme, rose 6.7% and in Tokyo out-of-favour tech investment firm SoftBank Group rose 7.2% to its highest since Feb. 10.

The main U.S. tech index ended up 2% overnight, cutting its year-to-date losses to 10% from 20% earlier this month.

Some previously solidly bullish investors, however, are worried about the impact of rising interest rates on the outlook for stocks.

“Although there is widespread criticism, it’s too early to take the view that the Fed won’t be able to negotiate the fine line of reducing inflation without derailing growth,” said Mark Haefele, Chief Investment Officer, UBS Global Wealth Management.

“Given a higher degree of uncertainty, rather than make a directional play on stocks moving higher, we prefer selected overweight and underweight positions, yielding an overall neutral allocation to equities.”

BOND SELLOFF

The most eye-catching moves recently have been in the bond market, although there was some calm on Wednesday. Two-year U.S. yields dipped from a six-year high.

The sharp rise in short-dated yields has flattened the gap between two and 10-year U.S. yields to its lowest levels since the coronavirus pandemic hit global markets in March 2020. An inverted yield curve is widely seen as a predictor for future U.S. recessions.

The selloff in short-dated yields prompted fed fund futures to price in an aggressive 190 bps through the remainder of the year after a 25 bps rate hike last week. Futures were nearly pricing in the probability of a 50 bps hike in May.

The selloff in U.S. markets has reverberated elsewhere with German and British bond yields climbing this week, although they too fell back slightly on Wednesday.

British inflation data on Wednesday showed prices rising to a new 30-year high of 6.2% last month versus a year ago — higher than economist expectations — although yields were unmoved.

Currency market activity continued to be relatively subdued, confirming the lack of any clear directional trends.

Against the U.S. dollar, the Japanese yen was down by 1130 GMT but held below 121 yen after Bank of Japan Governor Haruhiko Kuroda said it was premature to debate the exit from ultra-loose monetary policy.

The euro dropped 0.5% to $1.0981 while sterling was nearly half a percent weaker against a broadly stronger dollar.

Commodity prices, sent soaring by anticipated supply disruptions from the war in Ukraine, rose again against a lack of tangible progress toward peace.

Oil rallied. Brent crude futures rose 2.45% to $118.31 a barrel and U.S. crude climbed 2.15% to $111.62. [O/R]

Grain prices, which have jumped since Russia invaded Ukraine in late February, remained supported by supply concerns, especially for delivery later in the year. [GRA/]

(Reporting by Saikat Chatterjee and Tommy Wilkes; Additional reporting by Tom Westbrook in Singapore; Editing by Alison Williams and Chizu Nomiyama)