Better-than-expected gains from a range of US and European companies on Wednesday helped stabilize global stock markets, breaking through the gloom caused by rising interest rates and the threat of an energy crisis from Russia’s gas supply cuts.
Ten-year US Treasury yields — the benchmark interest rate for the global cost of capital — held close to a three-month low hit a low on Tuesday, as several recession gauges in bond markets continued to warn that growth in the world’s largest economy is slowing. if not goes backwards in.
However, bond gains were capped by the US Federal Reserve meeting, which is expected to lead to another large 75 basis point (bp) rate hike and healthy corporate earnings in the second quarter, despite cost pressures and labor shortages.
Futures for the US S&P 500 and Nasdaq rose 1 percent to 1.5 percent, while a pan-European stock index rose 0.4 percent.
Sentiment on Wall Street was up 4 percent — a 5 percent gain on shares in Microsoft and Google’s parent company, Alphabet, which forecast strong revenue growth and solid search engine advertising sales, respectively.
In Europe, Deutsche Bank reported a forecast increase in earnings, as did Italy’s Unicredit, pushing an index of European banking stocks to its week-long high.
A range of sectors also reported solid gains, from automaker Mercedes Benz and luxury company LVMH to energy company Equinor and food producer Danone.
“Some nice earnings numbers, especially from Big Tech and luxury goods,” said Vincent Manuel, CIO at Indosuez Wealth Management, though he notes the difference between buoyant earnings and softer macro sentiment.
“The question is how long will we continue to see this divergence?”
Previously, heavyweight chipmakers helped Japan’s Nikkei close higher, but a warning from the world’s second-largest chipmaker, SK Hynix, of dwindling demand sent other Asian stocks down 0.5 percent.
Australian miner Rio Tinto also posted a 29 percent drop in first-half profits and more than halved dividends, citing weak Chinese demand, higher costs and labor shortages.
Manuel van Indosuez noted that industrial and consumer durables reflected pressure better than technology and health companies.
“I would expect earnings guidance to be more cautious from companies,” he added.
Growth and inflation
The trade-off between growth and inflation will be kept in mind when the Fed announces its rate decision at 1800 GMT. Although a 75 bps price has been priced in, futures still imply a 15 percent chance of a 100 bps increase.
Treasury markets are already anticipating that so many sharp short-term gains will hurt longer-term growth, with 10-year yields staying solidly around 2.8 3198061, about 25 basis points below their two-year equivalent – the so-called curve inversion that often predicts recessions.
“(Corporate profits) help stocks, but bonds are pricing in economic weakness more than stock markets,” Nordea chief analyst Jan von Gerich said.
Uncertainty remains in the Fed’s future path, he noted, but added that “what they’re seeing on the activity side is taking a little bit of pressure off to do more.”
The situation in Europe is particularly fragile, as gas flows from Russia’s Nord Stream 1 pipeline are expected to halve from already cut levels on Wednesday. That has sent energy prices up, with German year-ahead prices hitting record highs.
Supply shortages and potential energy rationing were some of the issues highlighted by the International Monetary Fund (IMF) on Tuesday as it lowered global growth forecasts.
A complete cut of Russian gas to Europe by the end of the year and a further 30 percent drop in oil exports could lead to virtually zero European and US growth next year, the IMF warned.
Those concerns caused the euro to record its largest single-day loss in a fortnight, though it made up 0.2 percent against the dollar on Wednesday.
Another source of concern is Italy after S&P Global lowered its outlook for Italy’s creditworthiness, pushing 10-year bond yields higher by 10 basis points and the risk premium versus Germany at its highest in more than a month.