By Geoffrey Smith
Investing.com -- Bond yields continue to push higher after Federal Reserve Chair Jerome Powell puts bigger, faster interest rate hikes in play. The European Central Bank tries to play down stagflation risks as Eurozone governments prepare a round of fuel subsidies. Nike (NYSE:NKE) earnings impressed late on Monday, while Carnival (NYSE:CCL)and Adobe (NASDAQ:ADBE) are due to report later. Tesla's (NASDAQ:TSLA) new German factory opens for business. China Evergrande has a shocking new disclosure and a more expensive dollar takes the edge off oil prices ahead of the API's weekly inventory data. Here's what you need to know in financial markets on Tuesday, 22nd March.
1. Powell puts the skids under bonds
U.S. bond yields continued their move higher overnight after one of their biggest one-day gains in a decade on Monday in response to Federal Reserve Chairman Jerome Powell warning that bigger interest rate hikes may be necessary in the coming months.
Powell had turned markets on their head on Monday by warning that the labor market is “extremely tight” and inflation “much too high”. He said that the Fed “may well reach the conclusion that we need to move more quickly” than currently expected.
The benchmark 10-year Treasury yield had leaped as much as 17 basis points in response and gained another 3 basis points to trade at 2.35% by 6 AM ET (1000 GMT), its highest since May 2019. The five-year yield, more sensitive to short-term interest rates, is now above the 10-year at 2.38%, while the two-year yield is at 2.19%.
Look for further comment on the outlook from NY Fed chief John Williams, Cleveland’s Loretta Mester and San Francisco’s Mary Daly later.
2. ECB plays down stagflation fears as Eurozone prepares fuel subsidies
The European Central Bank’s vice-president Luis De Guindos downplayed suggestions that the Eurozone is headed for stagflation this year, saying the bank still expects growth of over 2%, even if inflation is now expected to stay higher for longer.
The comments stabilized the euro, which had fallen below $1.10 again in the wake of Powell’s comments, which in turn had come after data showing that German producer prices rose by nearly 26% on the year in February.
De Guindos also gave the green light to a range of energy subsidies being rolled out by Eurozone states in response to the surge in fuel prices. EU leaders are due to meet on Thursday to discuss such measures along with a tightening of sanctions on Russia. The Wall Street Journal reported on Monday that the EU is moving closer to following the U.S. in banning Russian oil imports, although Germany and Hungary are still opposed.
3. Stocks set to open higher; Nike up after earnings; Adobe eyed
U.S. stocks are set to open slightly higher later, having ended in negative territory on Monday in response to Powell’s comments.
By 6:15 AM ET, Dow Jones futures were up 114 points, or 0.4%, while S&P 500 futures and Nasdaq 100 futures were both up 0.2%.
There’ll be economic data from Redbook Research and the Richmond Fed, while cruise operator Carnival and – after the bell – software giant Adobe are due to report. Other stocks likely to be in focus later include Nike, whose earnings late on Monday beat expectations despite falling sales in China, and Tesla, whose new factory in Germany starts production Tuesday.
4. Evergrande's unpleasant discovery; Alibaba's pleasant buyback surprise
Property developer Evergrande sent shockwaves through Chinese markets again, after it discovered that over $2 billion of a subsidiary's cash had been pledged as collateral for loans, and could therefore be seized by creditor banks.
The announcement explained the abrupt suspension of Evergrande shares in Hong Kong on Monday and raises fresh questions over standards of corporate disclosure in China, a worrying development both for the local market and one that bodes ill for its ongoing struggle with U.S. regulators over the transparency of Chinese accounts.
There was brighter news, however, from Alibaba (NYSE:BABA), which increased its buyback program by another $9 billion to $25 billion, days after vice-premier Liu He had signaled an easing up of the regulatory crackdown on the country’s biggest Internet companies.
5. Oil slides on more expensive dollar; API inventories due
Crude oil prices eased off slightly but remained well bid amid fears that the EU, by expanding its sanctions package, will end up tightening the global market as it competes for more non-Russian supplies.
By 6:25 AM ET, U.S. crude prices were down 0.6% at $109.34 a barrel, while Brent futures were down 0.3% at $115.31.
Prices were hit by the dollar’s rise, which makes oil more expensive for non-dollar importers, notably in emerging markets. Ghana and Egypt were forced to raise interest rates sharply on Monday while Hungary is expected to raise again at its meeting today.
Of more importance to the physical market, Indian oil refiners hiked their benchmark prices, raising the prospect of demand destruction. That might also be evident closer to home, when the American Petroleum Institute releases its weekly inventories data at 4:30 PM ET.