US equity futures retreated Wednesday and sovereign bonds extended a selloff as high inflation, a hawkish Federal Reserve and China’s Covid challenges keep investors on edge.
Nasdaq 100 contracts shed 1% following an after-hours Netflix Inc. slump on poor subscriber numbers that tempered optimism from an S&P 500 rally. Asian stocks were mixed — Japan climbed, China dipped and Hong Kong fluctuated.
Chinese banks maintained their lending rates, disappointing investors looking for a reduction to support an economy sagging under Covid lockdowns. The offshore yuan was at its weakest level against the dollar in six months.
Treasury yields rose as expectations of sharp Federal Reserve policy tightening hardened. Chicago Fed President Charles Evans said interest rates will probably exceed the neutral level. U.S. 10-year real yields turned positive for the first time since 2020, reflecting tighter financial conditions that may hurt equities.
The yen again slid against the greenback. The Bank of Japan offered to buy an unlimited amount of bonds to contain yields, underscoring its desire for ultra-loose monetary settings, in contrast to the Fed’s campaign against inflation.
Oil held losses in the wake of the International Monetary Fund’s dimming global growth outlook amid Russia’s war in Ukraine and China’s Covid challenges.
The fallout from price pressures, the war and China’s parlous economic outlook continues to shape sentiment. A top IMF official warned that stock and bond markets are vulnerable because the Fed and other central banks may be forced to tighten monetary policy more than anticipated to contain inflation.
“It takes time for the market to recognize and then respond to higher inflation,” Belita Ong, chairman at Dalton Investments LLC, said on Bloomberg Radio. “My concern is that we benefited from low interest rates during an era of peace, no wars, and during an era of very significant globalization. Both of those trends are now reversing.”
