Stock Market Rebounds on Lower Oil Prices and Bond Yields

Stocks Bounce as Lower Oil Prices and Bond Yields Drive Market Gains

By Jamie McGeever

Market Overview and Key Developments

ORLANDO, Florida, Sept 17 (Reuters) – World stocks paused their recent slide and rebounded strongly on Thursday, and the global bond rout also took a breather, as investors digested the US Federal Reserve’s interest rate hike the day before and cheered a second consecutive day of lower oil prices.

In my column today, I posit that US President Donald Trump will probably never see another interest rate as president. As The Rolling Stones famously said, you can’t always get what you want. Apparently, not even if you’re the most powerful person in the world.

Today’s Key Reads

• Investors are gaining more confidence in the Federal Reserve’s inflation-fighting backbone, but uncertainty about how far it will raise interest rates to keep prices in check is likely to cause volatility for stocks and bonds in the weeks ahead.
• On Wednesday, US Federal Reserve Chair Kevin Warsh became his predecessor, Jerome Powell. Perhaps not in his own eyes or in the eyes of investors, but, crucially, to the White House that appointed him. The central bank announced an increase in the federal funds rate, and a clear intent to lower inflation, perhaps through further hikes. That won’t please Trump, who thinks rates should be “1%, or less”. The administration’s campaign for easy money and against Federal Reserve independence is now likely to return in earnest.
• The Bank of England kept interest rates on hold on Thursday but ​warned they might have to go up if the Iran war drags on, while predicting British inflation will top 4% early next year.
• The Bank of Japan is set to raise interest rates to a 31-year high on Friday and signal readiness to keep pushing up borrowing costs, joining other major central banks in fighting persistent inflation pressures driven by soaring ‌oil costs.
• The US Securities and Exchange Commission on Thursday unveiled its long-awaited exemption that will allow companies to offer trading in blockchain-based or “tokenized” stocks and other securities, in a major move that could integrate digital assets more deeply into traditional markets.

Today’s Key Market Moves

STOCKS: MSCI World +0.7%, Europe, UK both up around 1%, best day since July. On Wall Street, Dow +0.6%, S&P 500 +1%, Nasdaq +1.7%.SECTORS/SHARES: Nine sectors on the S&P 500 rise, two fall. Tech +2.2%, consumer discretionary +1.5%. Energy -0.1%. “SOX” chip index +3%.FX: Dollar breaks 6-day winning streak. NZ dollar among biggest gainers.BONDS: Bonds mostly rebound, US curves still flatten a little. UK 30-year yield slides 12 bps on BoE QT news.COMMODITIES/METALS: Oil -1%, WTI briefly dips below $100. Average US diesel nudges $6.40/gallon. Gold +2%, biggest rise in a month.

Today’s Talking Points

The morning after the night before

Investors around the world have had a chance to digest the Fed’s rate hike, and more significantly, its “dot plot” signals and Warsh’s press conference. It was a “buy the rumor, sell the fact” kind of day — short-covering and profit-taking meant stocks and bonds mostly rose, oil fell, and worries over inflation, long bonds, or the Fed falling behind the curve were put to one side. For now.

Will Relief Last?

Does this relief quickly fizzle? While the Fed has taken a hawkish turn, the anticipated hiking cycle of around 100 bps in total, as per current market pricing, would be the shallowest in history. Maybe that’s how it pans out. On the other hand, the Atlanta Fed’s GDPNow model is pointing to 5.1% growth in Q3, which would be the strongest non-pandemic-distorted quarter since 2000. Growth sentiment on the FOMC is strong too — not one of the 18 policymakers who contributed to the latest Summary of Economic Projections sees downside risks to growth.

Gilt trip

The Bank of England on Thursday unveiled plans for how it intends to offload most of the remaining £488 billion of bonds on its balance sheet by 2034. That longer-term plan might weigh on the gilt market, but the Bank’s more immediate plans were much more warmly received — the BoE will pause bond sales for ‌the next six months, and halt sales of long-dated gilts entirely.

Impact on Bond Markets

Along with US Treasury’s plans to triple the size of scheduled buybacks of long-dated Treasuries, the BoE’s tweak reflects growing concerns among global policymakers over the elevated level of long-term borrowing costs. Earlier this week, the 30-year gilt yield reached 5.95%, the highest since 1998. The 30-year yield tumbled 12 bps on Thursday, its biggest fall since May. So, immediate relief. But will it last?

Oh Canada

Canadian Prime Minister Mark Carney seems to be enjoying his tour of Europe, taking in a football match in Liverpool with UK PM Andy Burnham on Wednesday, and drawing laughs and warm applause for his speech to the European Parliament on Thursday. One suspects Trump is rather less impressed, and on Wednesday the US President threatened trade sanctions in response to European Commission President Ursula von der Leyen’s proposal to create a new status for the EU-Canada relationship.

US-Canada Trade Tensions

Carney did not adopt von der Leyen’s term “associate member”, but he clearly wants to forge stronger, closer trade ties across the Atlantic. Little wonder, perhaps, as the US-Canada trade war shows no sign of cooling. Asked about Trump’s threats, Carney said: “Canadians are united that nobody is going to tell us what language we speak. No one is going to dictate our culture or with whom we can strike agreements internationally.” Neither Trump nor Carney seem to be backing down. Not publicly, at least.

What could move markets tomorrow?

• Japan interest rate decision
• Reserve Bank of Australia Governor Michele Bullock speaks
• UK retail sales (August)
• Germany PPI inflation (August)
• US Federal Reserve officials scheduled to speak include vice chai