European stocks edge higher, yields rise as markets adjust rate
expectations
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[March 22, 2022] By
Elizabeth Howcroft
LONDON (Reuters) - European stock indexes
opened slightly higher on Tuesday, while U.S. and European government
bond yields rose to new multiyear highs as investors adjusted their
expectations for rate hikes following hawkish comments from the U.S.
Federal Reserve.
Fed Chair Jerome Powell said that the central bank could move "more
aggressively" to raise rates to fight inflation, possibly by more than
25 basis points at once.
Markets scrambled to recalibrate the higher possibility of a 50 bps
hike. On Tuesday morning, money markets were pricing in a 80% chance of
a 50 bps hike in May.
At 0853 GMT, the U.S. 10-year Treasury yield was at 2.3497%, its highest
since 2019.
RBC Capital Markets' chief U.S. economist, Tom Porcelli, wrote in a note
to clients that during the speech "it was easy to wonder if a 75bps hike
or even going intra-meeting is possible."
"Both outcomes seem incredibly extreme but when we hear Powell talk
about inflation he comes off as incredibly anxious to us."
Euro zone government bond yields also rose, with Germany's benchmark
10-year yield hitting a new 2018 high of 0.51%.
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Although Wall Street had closed lower after Powell's comments, stock
markets in Europe opened a touch higher, with the MSCI world equity
index, which tracks shares in 50 countries, up 0.2% on the day.
The STOXX 600 was up 0.5%, having climbed high in recent sessions to
reach a one-month high. London's FTSE 100 was up 0.6%.
"With positioning light, sentiment weak and geopolitical risks likely to
ease over time, we believe risks are skewed to the upside," wrote
JPMorgan strategists in a note to clients.
JPMorgan said that 80% of its clients plan to increase equity exposure,
which is a record high.
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![](../images/032222PIX/busine27.jpg)
Men wearing protective face masks walk under an electronic board
showing Japan’s Nikkei share average inside a conference hall, amid
the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January
25, 2022. REUTERS/Issei Kato
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"We believe investors should add risk in areas that overshot on the downside
such as innovation, tech, biotech, EM/China, and small caps. These segments are
pricing in a severe global recession, which will not materialize, in our view."
The conflict in Ukraine continued to weigh on sentiment. U.S. President Joe
Biden issue one of his strongest warnings yet that Russia is considering using
chemical weapons.
Oil prices continued to rise overnight following news that some European Union
members were considering imposing sanctions on Russian oil - although Germany
said that the bloc was too dependent on Russian oil and gas to be able to cut
itself off.
But prices dropped around 0800 GMT, with Brent crude futures down 0.9% on the
day by 0916 GMT and West Texas Intermediate futures down 0.7%.
The U.S. dollar index was up 0.1% at 98.61, while the euro was a touch lower at
$1.1009.
The Japanese yen plunged past the 120 level versus the dollar, hurt by the
divergent rate-hike expectations for the United States and Japan.
"The perception that the JPY may become a funding currency rather than a
safe-haven unit after the BoJ made it clear that they do not want to hike rates
at present has further helped USD-JPY break above the key 120 threshold,"
UniCredit said in a client note.
In cryptocurrencies, bitcoin was up 3.6% at around $42,515.
(Reporting by Elizabeth Howcroft, Editing by William Maclean)
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