Global stocks and bonds rallied on Thursday as investors weighed fresh U.S. economic data and comments from Federal Reserve officials for clues on whether the central bank will raise interest rates this month, while a sharp rebound in the yen and renewed military strikes between the United States and Iran kept markets on edge.
A recovery in global bond markets helped improve sentiment across equities, even as investors continued to grapple with elevated government borrowing costs, geopolitical risks and uncertainty over the outlook for monetary policy.
The STOXX 600 rose 0.2% in Europe, snapping a three-day losing streak, while U.S. stock futures gained about 0.1%.
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In U.S. premarket trading, Broadcom shares fell roughly 2% after the chipmaker issued a fourth-quarter revenue forecast that fell short of market expectations. Snowflake shares, meanwhile, surged more than 20% after the cloud data platform provider raised its annual revenue outlook.
The immediate focus for investors is Friday’s U.S. nonfarm payrolls report, which could provide a crucial signal on the health of the labor market after weaker-than-expected private employment data for August.
Fed Governor Christopher Waller is also scheduled to speak, following comments from New York Fed President John Williams on Wednesday that rising long-term Treasury yields appeared to reflect a solid economy rather than heightened inflation concerns.
Williams said he was still gathering information before making his next monetary-policy decision.
Markets have nevertheless become increasingly cautious about the Fed’s policy path. Money markets were pricing in roughly a 60% probability of a rate hike this month, up from less than 40% a week earlier.
That shift has added to volatility across bonds and currencies, particularly as investors attempt to determine whether elevated yields are being driven by inflation, fiscal concerns and geopolitical risk or by stronger underlying economic growth.
“There is an interpretation about why yields are moving higher — is it good, or bad? I feel that the negative reasons are more often put forward than the positive reasons,” said Samy Chaar, chief economist at Lombard Odier.
He pointed to concerns over heavy government debt issuance, fiscal risks, geopolitics and the normalization of risk premiums as oil prices rise, but said stronger nominal economic growth could also explain higher yields.
“If demand is strong and it’s demand that is keeping yields at high levels, it’s quite a good environment for multi-asset portfolios, in the sense that you want to be exposed to profit growth with equities, and you want to be exposed to carry as well, with credit,” Chaar said.
Bond Yields Retreat from Recent Highs
Sovereign bond yields fell on Thursday after reaching multiyear highs over the past week as markets priced in tighter monetary policy and growing concerns about government finances.
The benchmark U.S. 10-year Treasury yield fell 2 basis points to 4.77%, while Germany’s 10-year Bund yield also declined 2 basis points to 3.353%. The retreat provided some relief to equity investors because lower long-term yields can reduce the discount rate applied to future corporate earnings and make fixed-income assets relatively less attractive compared with stocks.
But the broader bond-market backdrop remains challenging. Investors are confronting heavy government borrowing requirements at the same time that central banks are reassessing the pace and direction of interest-rate policy.
That has made Friday’s payrolls report attractive. A strong labor-market reading could reinforce expectations for tighter monetary policy, while signs of further deterioration in employment could strengthen the case for a shift toward easier policy.
Yen Surges As BOJ Rate Expectations Build
Currency markets delivered an even stronger signal of changing expectations. The yen rose more than 2.5% over the previous two sessions to around 156.1 per dollar, putting it on course for its strongest two-day advance since coordinated U.S.-Japanese intervention in early August.
The move pushed the dollar index down 0.4%.
The yen’s rally has been fueled by growing expectations that the Bank of Japan could raise interest rates sooner rather than later. A stronger yen also reflects a narrowing of the interest-rate advantage that has supported the currency’s weakness for much of the past several years.
The dollar fell 0.5% against the Swiss franc, while the euro gained 0.18% to about $1.1609 and sterling rose 0.1% to $1.349.
The speed of the yen’s appreciation is likely to keep investors alert to the risk of further official intervention, particularly given the currency’s history of sharp moves when Japanese authorities have signaled concern over excessive depreciation.
Oil Rises As U.S.-Iran Conflict Adds Risk Premium
Oil markets remained highly sensitive to developments in the Middle East as the United States and Iran exchanged their largest barrage of attacks since July, reviving concerns that the conflict could broaden across the region.
Brent crude rose about 1% to $96.62 a barrel, extending its advance to a fourth consecutive session.
The latest military escalation has injected a fresh geopolitical risk premium into oil prices, with investors focused on the possibility that a broader conflict could disrupt crude production, exports or key shipping routes.
The rise in oil prices presents an additional complication for central banks. Higher energy costs can feed inflation while simultaneously weakening household purchasing power, potentially making it harder for policymakers to respond to slowing economic activity with lower interest rates.
Gold Gains As Investors Seek Protection
Gold also advanced, rising 1.1% to $4,434 an ounce. The metal is now nearly 13% above its seven-month low in June.
Geopolitical uncertainty has supported demand for the traditional safe-haven asset, while concerns over the long-term purchasing power of the U.S. dollar have provided another source of support.
The latest evidence of central-bank demand came from the Netherlands. The Dutch central bank said on Wednesday that it had moved a substantial portion of its gold reserves from North America to vaults in London over the previous six months, saying the relocation would improve its preparedness for a potential crisis.
The move adds to a broader pattern of central banks paying greater attention to the location and accessibility of their gold reserves amid heightened geopolitical uncertainty.
For global investors, Thursday’s market moves point to an increasingly complicated policy environment. Equities are benefiting from signs of economic resilience, bonds are caught between stronger growth and fiscal and inflation risks, currencies are responding to divergent central-bank expectations, and commodities are carrying a larger geopolitical premium.
The next major test will come from the U.S. payrolls report. A strong reading could revive the recent selloff in bonds by strengthening expectations for tighter Fed policy, while a weak report could reinforce the case for monetary easing and provide further support for risk assets.