Stocks Rebound as Traders Buy Back in Before Fed Testimony

January 11, 2022Updated: January 11, 2022

LONDON—Global stocks recovered some of their recent losses on Tuesday and government bond yields retreated as investors bought back into riskier assets ahead of the appearance of U.S. Federal Reserve Chair Jerome Powell before the Senate Banking Committee.

Investors hope Powell will provide more clues to the timing of expected policy tightening when he appears before the committee, followed by a hearing with vice chair nominee Lael Brainard on Thursday.

The small rise for shares in Tuesday’s early trading follows a week of hefty losses for stock markets after investors panicked about the prospect of faster monetary tightening in the United States and the impact of richly valued share prices that hit a series of record highs in 2021.

But many analysts say that, while bond yields look set to remain higher than they did last year, a robust outlook for economic growth and corporate earnings will provide some support to stocks.

The MSCI All Country stock index nudged up by 0.2 percent p to 742.63 points on Tuesday. In Europe, the STOXX index jumped 1 percent, snapping a three-day losing streak for its best day in nearly three weeks.

Futures pointed to a stronger open on Wall Street after a rebound in late trading on Monday for the tech-heavy Nasdaq, which had earlier skidded into correction territory, defined as a 10 percent drop from its peak last year.

“The flight path is still for growth to remain above trend, with healthy businesses and households and capex policies,” said Grace Peters, head of investment strategy for Europe, Middle East, and Africa at JPMorgan Private Bank.

“A lot of this money is just starting to come into the system now, so we don’t think the hawkish mood at central banks and the move up in bond yields derails the economic expansion or leads to any prolonged downturn in equities,” she added.

Asian shares were weaker, however. The Nikkei index fell 0.9 percent as trading resumed after a holiday on Monday. Australian stocks shed 0.8 percent, Hong Kong was flat and China’s 300 index lost 1 percent.

Red-hot Inflation?

U.S. December consumer inflation data will be released on Wednesday, with headline CPI expected at a red-hot 7 percent year on year, boosting the case for rates to rise sooner rather than later.

Inflation pressures prompted the Fed in December to flag plans to tighten policy faster than expected, possibly even raising rates in March, though that was before it became clear just how fast the Omicron coronavirus variant would spread.

Jerome Powell testifies
Federal Reserve Board Chairman Jerome Powell testifies during a hearing before Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, on Nov. 30, 2021. (Alex Wong/Getty Images)

Fed chief Powell pledged “to prevent higher inflation from becoming entrenched” in comments prepared for Tuesday’s congressional hearing.

He did not mention the central bank’s plans to raise rates explicitly and this week’s hearings are the first opportunity for Powell and Brainard to shed more light on their views.

“We continue to believe liftoff in March is increasingly likely. How these debates are settled will likely have implications for post-liftoff rate hikes,” Nomura economists said in a report, referring to U.S. monetary policy.

“In particular, we believe comments regarding earlier runoff and less aggressive rate hikes support our view that the Fed will slow the pace of rate hikes to two per year in 2023.”

Euro zone government bond yields hovered near recent peaks while ten-year U.S. Treasury yields rose to an almost two-year high above 1.8 percent overnight before retreating to 1.76 percent, providing only little support for the greenback.

The dollar index, which measures the currency against six counterparts, hovered around 95.91.

Euro zone bond yields also fell back from Monday’s highs, with the German 10-year yield trading at -0.04 percent against Monday’s high of -0.025 percent.

The euro hit a seven-week high versus the Swiss franc after a rise in Swiss National Bank sight deposits last week—a possible sign that the central bank is intervening to limit the franc’s strength.

Bitcoin was back up near $42,000 after dropping below $40,000 on Monday for the first time since September.

Oil prices gained after two days of losses, with Brent crude futures up 1.42 percent at $82.02 a barrel. U.S. West Texas Intermediate (WTI) rose 1.53 percent to $79.43.

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