Global stock markets experienced a notable resurgence on Tuesday, coinciding with a retreat in bond yields, prompted by Federal Reserve officials’ hints of caution regarding interest rates. Simultaneously, oil prices saw a slight decline, but the ongoing Middle East violence introduced an element of uncertainty into trading.
The MSCI All-World index rallied for the fifth consecutive day, surging by 0.5%, following a previous week’s slump that led to five-month lows. Contributing to this recovery was Europe’s STOXX 600, which posted a notable 1.4% gain.
E-mini futures for the S&P 500 index exhibited gains ranging between 0.1% and 0.2%. Meanwhile, Treasuries staged a robust rally, aligning with the global trend of declining bond yields observed on Monday, when the U.S. market remained closed for a holiday.
The initial flight to safe-haven assets, such as the U.S. dollar, gold, and government bonds, showed signs of abatement, and oil prices, which had surged by more than 4% at one point on Monday, retraced slightly.
Nevertheless, investor attention remained firmly affixed to the military clashes unfolding between Israel and the Palestinian Islamist group Hamas. Over the weekend, Hamas launched a surprise assault, resulting in numerous casualties and abductions.
In response, the Israeli military announced the call-up of an unprecedented 300,000 reservists and imposed a comprehensive blockade on the Gaza Strip. These developments heightened concerns of a potential ground assault.
“Geopolitical tensions pose significant challenges for the markets, given the wide range of possible outcomes. Consequently, in the absence of a clear direction or development, it’s challenging to determine market trends,” commented Berenberg economist Kallum Pickering. “Currently, markets indicate that there is no imminent threat of an oil shortage, and we observe only a modest increase in demand for safe-haven assets.”
Israeli markets and companies with exposure to Israel bore the brunt of this unrest. The shekel, which had reached a nearly eight-year low against the dollar the day before, declined by 0.3% on the day. Additionally, the cost of insuring against the risk of sovereign default surged to its highest level since 2016.
Fed’s Influence on Yields
Government bonds, typically sought by investors during periods of geopolitical or financial turmoil, witnessed one of the most significant sell-offs in recent years. This came amid growing perceptions that interest rates may remain elevated for an extended period—a scenario generally unfavorable for fixed-income assets.
Last week, the yield on 10-year U.S. Treasuries soared to levels not seen since the financial crisis. However, by Tuesday, it had substantially retraced from those peaks. This followed comments by senior Fed officials, who indicated that the recent surge in Treasury yields could deter the central bank from implementing further rate hikes.
“Based on the Fed’s remarks on Monday, the market appears to believe that the central bank is increasingly attentive to bond yields,” observed ING strategist Chris Turner. “Nevertheless, we suspect that this may not be the defining narrative for the bond market, as no central bank likes to be constrained by the implications of bond yields on monetary policy.”
The 10-year Treasury yield had retreated by 11 basis points on the day, standing at 4.676%, nearly 30 basis points lower than Friday’s peak of 4.895%.
The U.S. dollar maintained its stability against a basket of major currencies, having experienced a sharp surge on Monday.
Oil prices eased somewhat after their 4% surge on Monday. Brent crude edged down by 0.1% to $88.14 per barrel, while U.S. futures remained flat at $86.49.
Spot gold witnessed a 0.2% decline, settling at $1,860 per ounce, following its one-week highs on Monday.
Adding to the unease in Asian markets, China’s largest private property developer, Country Garden Holdings, issued a warning regarding its ability to meet offshore payment obligations promptly.
