Fed composes fraught markets

A look at the day ahead in European and global markets

By Vidya Ranganathan, Editor, Finance and Markets Breaking News

Data refreshes every time you open this email. For more European market news, click here. Please send any feedback to morningbid@thomsonreuters.com” rel=”noopener” target=”_blank” style=”text-decoration: underline; color: #005da2;”>morningbid@thomsonreuters.com.

It’s happening all-at-once again in markets. A powerful rally has lifted Japan’s Nikkei and Asian stock markets, and European and U.S. stock futures indicate they will follow too.

Given the confluence of factors that drove the selloff – Japan’s rate hike, an unwind of yen-funded global trades, weakness in U.S. jobs and Middle East tensions – strangely, all it took was a soothing message from central bank officials to turn things around.

The German share price index DAX graph is pictured at the Frankfurt stock exchange, in Frankfurt, Germany, March 17, 2023. REUTERS/Staff

As Europe wakes up, the Nikkei is up 9%, nearly erasing the 12.4% decline on Monday that pushed it into bear market territory.

Wall Street is looking steadier, with S&P 500 futures rebounding 1.5%. The three-day rout cost the S&P 500 8% of its value.

The Europe-wide STOXX 600 index, seems set to rise, after it logged its steepest three-day decline since June 2022 on Monday, closing below the key 500-point mark for a second day.

Sceptics are quick to remind us that Japan is not the proverbial canary, as it has always come back fast from a sell-off. Given lingering concerns over inflated tech earnings and the view the Fed may have held rates too high for too long, the carnage may not be over.

Add to that the still heavy overhang of yen-funded investments globally, not just in U.S. stocks but also in emerging market high-yielders such as India’s rupee , Mexico’s peso and South Africa’s rand.

Graphics are produced by Reuters.

Currencies are reversing some of Monday’s sharp moves, with the dollar edging up to 145.50 yen from as deep as 141.675 and up against the safe-haven Swiss franc too.

As fear gauges go, junk bond spreads have blown out and are ones to watch. Another recession indicator – the gap between two-year and 10-year Treasury notes – turned positive for the first time since July 2022 on Monday.

The Nikkei volatility index is still double levels it was at last week. The STOXX volatility index ended Monday not too far from its highest level since March 2022, while S&P volatility is also still elevated.

As fear subsides, Germany’s safe-haven two-year bond yield should recover further. It hit its lowest level since March 2023 on Monday.

Graphics are produced by Reuters.

Morning Bid is sent every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.

Want to stop receiving this email? Unsubscribe here. To manage which newsletters you’re signed up for, click here.

Reuters Terms & Conditions and Privacy Statement