US stocks bounced back and government bonds softened on Monday, reversing some of the tumultuous moves last week that followed a Federal Reserve meeting where officials took a more hawkish tone on interest rates and inflation.
The S&P 500 closed higher by 1.4 per cent, a resurgence that came after it posted its worst performance in almost four months last week.
The yield on the 10-year US Treasury bond, which also dropped sharply last week, rose 0.05 percentage points to 1.49 per cent.
“What the market has priced in has eliminated completely the fears of a new inflationary regime that was the main narrative [before the Fed meeting],” said Alessio de Longis, senior portfolio manager at Invesco.
Fed policymakers on Wednesday projected that they would twice raise interest rates in 2023 from their record-low level. That marked a shift from a previous median forecast showing the first increase as far away as 2024.
Fed officials’ statements prompted some investors to fear a rapid tightening of monetary policy in the US that could derail the global economic recovery from Covid-19. Investors also backed out of so-called reflation trades, which had involved selling government bonds and buying shares in companies that benefit from economic growth, such as materials producers and banks.
On Monday, however, energy, basic materials and banking stocks were the best performers on the S&P 500. The technology-focused Nasdaq Composite index was also up, gaining 0.8 per cent on the day.
The Russell 2000 index of smaller US companies, whose fortunes are more closely tied to US economic growth, rose 2 per cent. In Europe, the Stoxx 600 share index climbed 0.7 per cent, with materials stocks at the top of its leaderboard.
The market’s about-turn was exemplified by the yield on the 30-year Treasury bond, which briefly fell below 2 per cent early on Monday morning for the first time since February 2020, before rebounding and moving nearly 0.10 percentage points higher to 2.1 per cent.
The gyrations helped to push up the ICE Bank of America Move index, a measure of expected volatility in the Treasury market, to about 65, having languished at about 50 at the start of the month.
Some analysts said the bond market reaction had been too pessimistic, predicting a broad-based economic slowdown in response to Fed rate increases that had not happened yet.
Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham, said: “The facts are that the Fed hasn’t done anything yet. Wall Street loves to climb the wall of worry.”
The fall in long-term yields “is only justified if the Fed is making a policy error, choking the economy”, said Peter Chatwell, head of multi-asset strategy at Mizuho. “We think this is far from the truth — the Fed has simply sought to prevent inflation expectations from de-anchoring.”
Elsewhere in markets, the dollar index, which measures the greenback against other main currencies, dropped 0.4 per cent on Monday after gaining almost 2 per cent last week.
Brent crude, the international oil benchmark, rose nearly 2 per cent to $74.93 a barrel.
Additional reporting by Tommy Stubbington in London