Stocks fell Thursday and bonds were again on the back foot, weighed down by the impact of high inflation and tightening monetary policy.

Drops in China and Hong Kong -- including a fizzling tech rally -- sapped Asian shares, while US futures dipped after Wall Street snapped a two-day climb.

Oil’s advance past $122 a barrel is stoking worries about rising costs. Sentiment also took a knock after Shanghai said it will lock down a district on Saturday for Covid testing, raising concerns about the city’s reopening.

Benchmark Treasury yields held above 3%, while New Zealand’s 10-year yield touched the highest level in seven years.

Traders are awaiting the European Central Bank decision. Officials are set to wind down trillions of euros of asset purchases in a prelude to an interest-rate hike expected in July. The euro edged up and European equity futures slid.

“Chances are that the ECB will have a hawkish pivot today,” Carol Kong, a strategist at Commonwealth Bank of Australia, said on Bloomberg Television. “If we do see Christine Lagarde leaning toward a 50 basis-points hike in July, that’s going to be very supportive of the euro-dollar.”

Markets remain fixated on the risk of a downturn triggered by rate hikes across much of the world to quell price pressures.

The OECD added to the gloom with a warning that the global economy will pay a “hefty price” for Russia’s war in Ukraine in the form of weaker growth, stronger inflation and potentially long-lasting damage to supply chains.

“Our view is that the chance of recession by the end of 2023 is 40% or so,” Anna Han, equity strategist at Wells Fargo Securities LLC, said on Bloomberg Television. An “upward surprise” from the US consumer-price index release Friday could flatten the Treasury yield curve, she added.

The dollar-yen pair is dominating foreign-exchange markets. Japan’s currency steadied Thursday, but its weakness this year has put the 2002 high of 135.15 in play. China could see the trend as an unfair competitive advantage, said Jim O’Neill, former chair of Goldman Sachs Asset Management.

Data in China showed exports grew at a faster pace in May than the previous month as Covid-related disruptions eased. The offshore yuan strengthened.

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Source:
courtesy of BLOOMBERG

by Sunil Jagtiani

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