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US stocks rise and government bonds soften as traders anticipate rate rises

US and European stocks rose on Tuesday, while government bond prices softened, as traders anticipated central banks on both sides of the Atlantic tightening monetary policy to curb surging inflation.

The S&P 500 share gauge increased by 0.6 per cent as investors balanced signals from Federal Reserve chair Jay Powell about a series of US interest rate rises this year with his reassurance that tightening would not spark a recession.

The technology-focused Nasdaq Composite added 0.7 per cent.

Meanwhile, the yield on the 10-year US Treasury note, a benchmark for debt costs worldwide, added 0.05 percentage points to 2.36 per cent — a level not seen since May 2019 — after a sell-off overnight. Bond yields move inversely to their prices.

Powell said on Monday that the Fed should move “expeditiously” towards tighter monetary policy. He also pushed back on concerns that this would cause a recession, citing episodes in 1965, 1984 and 1994 when the Fed slowed an overheated economy without prompting a sharp contraction.

“The bond market is responding to expectations of tighter monetary policy, but equity markets are saying if Powell is confident about the growth outlook then risk assets will do well,” said Seema Shah, global investment strategist at Principal Global Investors.

“Equity markets responding in this way is a bit surprising,” she added. “One of these views is going to give at some point.”

Europe’s regional Stoxx 600 share index, which remains more than 6 per cent lower for the year, added 0.6 per cent, with strong gains for financial stocks. Bundesbank president Joachim Nagel said on Monday that the European Central Bank should raise interest rates this year if the inflation outlook warranted it. Germany’s Xetra Dax rose 0.7 per cent and London’s FTSE 100 gained 0.5 per cent.

The US Treasury market is experiencing its worst month since 2016 after the Fed raised interest rates last week for the first time since 2018. US consumer price inflation soared to a fresh 40-year high of 7.9 per cent last month.

Russia’s invasion of Ukraine has prompted sharp jumps in the price of commodities from oil to cotton, exacerbating inflationary pressures caused by resurgent demand following coronavirus shutdowns and prompting markets to predict the Fed raising its funds rate to beyond 2 per cent by December.

“Inflation expectations for the next one to two years are now extremely high,” said Brian Nick, chief investment strategist at Nuveen. “But the scenario where the Fed goes ahead and does what it is signalling it will do is probably the best-case scenario,” he added. “Do too little and inflation becomes further entrenched.”

The 10-year German Bund yield, a barometer for eurozone borrowing costs, rose 0.06 percentage points to 0.51 per cent, its highest since October 2018.

Brent crude edged 0.1 per cent lower on Tuesday to $115 a barrel. The oil benchmark remains almost a fifth higher since February 23, the day before Russia launched its incursion into Ukraine.

The dollar index, which measures the US currency against six others, was flat. The yen dropped to ¥121 per dollar, its weakest level in more than six years, boosting the shares of Japanese exporters.

Hong Kong’s Hang Seng index gained 3 per cent, picking up a rally that began last week when Chinese vice-premier Liu He made a rare intervention to pledge state support for the economy and capital markets.

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