Futures Steady as Traders Assess Inflation Outlook: Markets Wrap

A semblance of calm returned to markets on Wednesday after the carnage sparked by hotter-than-expected American inflation that prompted investors to reassess the outlook for interest rates and economic growth.

US equity-index futures held modest gains after a measure of producer-prices fell for a second month in August, in line with economists’ expectations. Shares had their biggest drop in more than two years Tuesday, with the S&P 500 falling more than 4% and the Nasdaq 100 sliding more than 5%. A gauge of the dollar retreated after jumping the most in three months on Tuesday. The 10-year Treasury yield rose about five basis points.

While the magnitude of Tuesday’s equities rout was impressive, the S&P 500 only reversed gains made in the previous four sessions that had been fueled by expectations of cooling inflation that would give the Federal Reserve room to temper its tightening path. The lack of a surge in the VIX index — known as the “fear gauge” — suggests that the selloff was a recalibration of those expectations rather than panic selling.

“Heading into the August CPI print, a number of traders thought they had information, and positioned very aggressively in the cash equity and derivatives markets,” said Christopher Harvey, head of equity strategy at Wells Fargo. “It turns out they did not have any real information on CPI (only a hunch based upon recent trends), and now they do not have as much AUM.”

Swaps traders are now pricing in a hike of three-quarters of a percentage point next week, with some wagers appearing for a full-point move. The two-year Treasury yield, the most sensitive to policy changes, rose two basis points after jumping as much as 22 basis points Tuesday, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning.

“An easing in inflationary pressure later this year will allow the Fed to broaden its focus again in order to manage the economic slowdown. However, we are not there yet,” said Mathieu Racheter, head of equity strategy at Bank Julius Baer. “In the meantime, earnings estimates will likely continue to be adjusted downwards, while higher real rates keep valuations at bay. For now, we recommend staying defensively positioned.”

The Stoxx Europe 600 index slipped more than 1%, adding to Tuesday’s 1.6% drop. Utilities were among the worst-performing sectors as the European Commission considers plans to contain the energy crisis, which may include revenue caps. Retailers gained, led by Inditex SA after the owner of the Zara fashion chain reported a jump in profit.

Asian stocks and bonds tumbled in the wake of the broad-based selloff on Wall Street while the yen strengthened after Japan warned of possible intervention in the currency market. Equity indexes in Japan, Hong Kong and Australia slumped.

The yen pulled back from a slide towards the key 145 level versus the dollar after a Nikkei report that the Bank of Japan conducted a so-called rate check with traders to see the price of the currency against the greenback. The finance minister warned that he would not rule out any response if current trends continued. The country’s 10-year bond yield rose to 0.25%, the upper end of the central bank’s policy band.

The greenback’s strength weighed on Asian currencies, with the Korean won among the big decliners. The People’s Bank of China set the daily reference rate for the yuan at the strongest bias on record versus the average estimate in a Bloomberg survey of analysts and traders. An index of emerging-market stocks fell 1.7%

“Many emerging markets are feeling the heat of the strong US dollar,” said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, citing their debt burdens in greenbacks. “Only China can afford to defy this global rate-rise trend by keeping its easing policy stance.”

Bitcoin nursed a drop of almost 10% overnight, the biggest decline since cryptocurrencies plunged in June.