Stocks rally ahead, bond markets ponder risks to US economy By Reuters

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© Reuters. FILE PHOTO: A man stands on a bridge with an electronic board displaying stock indices in Shanghai and Shenzhen, in Lujiazui Financial District in Shanghai, China, Jan. 6, 2021. REUTERS/Ali Song //

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Written by Koh Gui Ching

NEW YORK (Reuters) – U.S. and European stocks tumbled higher on Wednesday as investors reviewed economic and geopolitical risks, while oil prices jumped more than $2 on the prospect of more Russian sanctions.

The stock break came after three to four straight days of gains that wiped out losses incurred when Russia invaded Ukraine five weeks ago. Bond investors have questioned whether the US Federal Reserve’s policy tightening could hurt the world’s largest economy in the long run.

A major part of the US yield curve inverted briefly on Tuesday in what is widely seen as a harbinger of a recession, although it has since reversed.

“We see further upside in equities over the medium term given a strong growth profile, a lower benchmark for first-quarter earnings, and tighter credit spreads,” analysts at JPMorgan Global Markets Strategy said.

“We’re seeing a lot of negativity around the Fed since the start of the Fed’s tightening cycles has proven positive for stocks historically, and policy is pulling back in Japan and China.”

By midday in New York, the euro had lost 0.4%. It is down 0.13%, it is down 0.37%, and it is down 0.39%.

The MSCI World Stock Index, which tracks stocks in 50 countries, was down 0.1%.

The widely tracked yield curve showing the difference between the two- and 10-year US Treasury yields bounced back to four basis points on Wednesday. It briefly reversed to -0.03 basis point on Tuesday for the first time since September 2019. [US/]

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Long-term returns less than shorter returns indicate a lack of confidence in future growth. 10-year bond yields falling below two-year rates suggests a recession.

Fixed income and stock markets are far apart, said Sebastian Galley, chief macro analyst at Nordea Asset Management. “Stock markets are over-optimistic and fixed-income markets may be over-pessimistic.”

An inverted Treasury curve in recent decades has been followed by a two-year recession, including a downturn in 2020 caused by the COVID-19 pandemic.

The benchmarks in Frankfurt and Paris lost 1.5% and 0.74%, respectively, while London stocks bucked the trend and jumped 0.55%.

A day after rising above 0% for the first time since 2014, the German two-year bond yield rose six basis points at 0.01% – keeping the previous day’s highs in sight.

Stocks in Asia rose overnight after Ukraine suggested on Tuesday it adopt a neutral stance, in a sign of progress in face-to-face peace talks.

On the ground, the attacks continued, and Ukraine reacted skeptically to Russia’s promise in negotiations to reduce military operations around Kyiv.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.36% to its highest in nearly a month, with most Asian stock markets in positive territory.

Focus on Japan

The benchmark US 10-year yield was 2.3524%, after rising to 2.557% on Monday, the highest since April 2019, as traders prepare for a rapid US interest rate hike.

Higher US yields pushed up Japanese government bond yields.

The Bank of Japan increased its efforts to defend its main yield cap on Wednesday, offering to increase government bond purchases across the curve, including unscheduled emergency market operations.

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The widening gap between US and Japanese yields caused the yen to weaken sharply, but it pared its losses on Wednesday.

The Japanese currency rose 0.8% to 121.89 against the dollar from Monday’s low of 124.3, on fears that the Japanese authorities will intervene to support the yen. [FRX/]

Elsewhere in currency markets, the euro rose 0.6% to $1.1156, its highest level in four weeks, supported by peace talks between Russia and Ukraine.

In commodities, oil prices jumped more than $2 due to tight supplies and the growing possibility of new Western sanctions against Russia even as Moscow and Kiev hold peace talks.

LCOc1 futures rose $2.45, or 2.2%, at $112.68, while it rose 2.4% to $106.75 a barrel. [O/R]

It added 0.7% to $1,933.03 an ounce. [GOL/]

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