(Bloomberg) — Stocks rose and the Treasury yield curve flattened after Federal Reserve officials signaled they would probably begin tapering their bond-buying program soon.
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The S&P 500 extended gains after earlier rising as concerns about China Evergrande Group’s debt woes eased. The benchmark index had declined for four consecutive trading sessions. Treasury 2- and 5-year note futures dropped to session lows, flattening the yield curve, after revisions to Fed’s dot-plot forecasts for fed funds target show a 2022 median of 0.25%, up from 0.125% prior, while 2023 rate forecasts were also dragged higher.
“The statement makes clear that tapering will begin in either Nov. or Dec., as most assumed,” Adam Crisafulli, the founder of Vital Knowledge, wrote in a note. “While this isn’t more hawkish than feared, it’s not necessarily a reason to chase the market either,” he added, pointing to lingering concern over China, fiscal policy and corporate margins. “Policy is still going to be tighter going forward. This rally is an opportunity to lighten up exposure, not take on more.”
If progress toward the Fed’s employment and inflation goals “continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the U.S. central bank’s policy-setting Federal Open Market Committee said Wednesday in a statement following a two-day meeting.
Basic resources and energy were among the leading gainers in the Stoxx Europe 600 index as commodity prices steadied after Beijing moved to contain fears of a spiraling debt crisis at Evergrande that could ravage demand from the property sector. China avoided a major selloff as trading resumed following a holiday, after the country’s central bank boosted its injection of short-term cash into the financial system.
Read more: The Fed’s Debate on Tapering Just Got a Lot Trickier
The Fed’s timeline for tapering stimulus and any shifts in expectations for interest-rate increases are key for investors, who have grown used to central-bank stimulus supporting asset prices. The revision follows a period of market volatility stoked by Evergrande’s woes. China’s wider property-sector curbs are also feeding into concerns about a slowdown in the economic recovery from the pandemic.
“What markets are relieved by was that given the events of this week in terms of China, Evergrande, the debt ceiling dysfunction, some of the growth slowdown,” said Michael Arone, chief investment strategist at State Street Global Advisors’ U.S. SPDR business. “Some of what we’ve been seeing in markets, I think the risk was that the Fed would announce tapering and a timeline today, I think that would have been an unexpected surprise that would have created some volatility and some negative reaction by investors, and that didn’t happen, and so investors are happy.”
Elsewhere, Governing Council member Madis Muller said the European Central Bank may boost its regular asset purchases once the pandemic-era emergency stimulus comes to an end.
In Japan, the central bank left its main monetary policy settings unchanged. Markets in South Korea and Hong Kong were closed for a holiday.
Here are key events to watch this week:
Bank of England rate decision, Thursday
Fed Chair Jerome Powell, Fed Governor Michelle Bowman and Vice Chairman Richard Clarida discuss pandemic recovery, Friday
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
The S&P 500 rose 1.2% as of 2:39 p.m. New York time
The Nasdaq 100 rose 1%
The Dow Jones Industrial Average rose 1.3%
The MSCI World index rose 0.9%
The Bloomberg Dollar Spot Index fell 0.1%
The euro was little changed at $1.1727
The British pound was little changed at $1.3660
The Japanese yen fell 0.4% to 109.69 per dollar
The yield on 10-year Treasuries declined two basis points to 1.31%
Germany’s 10-year yield was little changed at -0.32%
Britain’s 10-year yield was little changed at 0.80%
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