The recent surge in U.S. Treasury yields has captured the market’s attention, as they ascend to levels not witnessed in a decade. Simultaneously, European equities have rebounded from a six-week nadir, and the Nasdaq Composite has surged over 1% in a notable show of resilience. This convergence of events has set the stage for a closely anticipated Federal Reserve meeting, scheduled for Friday at Jackson Hole, Wyoming.
The intricacies of these movements have engrossed the financial sphere, where the Dow Jones Industrial Average and the S&P 500 retraced early gains. In contrast, the tech-dominated Nasdaq Composite showcased its vitality, surging on the backdrop of optimism surrounding earnings.
Significantly, benchmark oil futures, while initially rallying more than $1 a barrel, retreated as aspirations for Chinese demand waned. The Dow Jones Industrial Average relinquished 0.11% to 34,463.69, while the S&P 500 captured gains of 0.69% to reach 4,399.77. The Nasdaq Composite demonstrated robust momentum, advancing by 1.56% to touch 13,497.59.
Within the tech sector, Nvidia led the charge among semiconductor stocks. The optimism was further fueled by HSBC’s upward revision of its target prices for the stock. These developments precipitate a crucial litmus test for valuations, as upcoming earnings reports loom large.
Market sentiment has been a intricate interplay, as Edward Moya, senior market analyst at OANDA, aptly stated: “Wall Street is having a hard time deciding what to do with stocks.” Everyone is expecting an impact from the surge in yields, but it seems like tech companies have held up. Nvidia is going to be key, according to Moya.
Meanwhile, in European markets, the STOXX 600 index recovered from a recent six-week low to conclude on a positive note. Intraday gains of up to 0.9% were observed, with the energy and mining sectors tracking the upward trajectory of crude oil and metals prices.
German equities, represented by the DAX index, embraced a modest uptick of 0.2%, a noteworthy development considering the unveiling of data indicating a higher-than-expected fall in German producer prices for July. In contrast, Adyen faced challenges, suffering an 8.6% slump following downgrades by two brokerages due to the firm’s failure to meet half-year expectations.
The backbone of these movements lies in the surge of U.S. Treasury yields. A significant milestone was achieved as the 30-year yield reached 4.47%, a peak not witnessed since April 2011. Moreover, the 10-year Treasury yield hit 4.35%, marking its highest point since November 2007, a period preceding the cataclysmic Great Financial Crisis triggered by the Lehman Brothers’ collapse.
As the week unfolds, market participants eagerly wait for the Federal Reserve’s Jackson Hole conference. Within this context, it is widely expected that Federal Reserve Chair Jerome Powell will acknowledge the spike in yields and the recent streak of robust economic indicators. Notably, the Atlanta Fed’s GDP Now tracker projects an impressive 5.8% growth rate for the ongoing quarter.
The outlook for the Federal Reserve’s policy trajectory remains a topic of discussion. A majority of polled analysts believe that the Fed has concluded its tightening cycle, whereas traders speculate on a 40% probability of a final hike by November.
“People are starting to get worried about the (bond) selloff and are looking ahead to (Federal Reserve Chair Jerome) Powell and what he says later this week about peak rates,” Reuters quoted Principal Global Investors’ chief global strategist, Seema Shah as saying.
China’s central bank’s unexpected decision to reduce its one-year benchmark lending rate on Monday, as part of authorities’ efforts to boost credit demand, but retaining the unchanged five-year rate amidst broader concerns about a rapidly weakening currency, sent shockwaves through Asian markets. The unexpected reduction of the one-year lending rate by 10 basis points, coupled with an unchanged five-year rate, reflects efforts to counteract challenges stemming from a deteriorating property market and sluggish credit growth.
According to Susannah Streeter, head of money and markets at Hargreaves Lansdown, ‘the small injection of stimulus by China’s central bank in the ailing economy has proved largely underwhelming given the scale of the challenges erupting across sectors, but it has given investors hope there could be more to come’.