US stock futures rose on Tuesday and the euro and sterling both rebounded, in a sign of improving sentiment after several days of volatile trading.
Contracts tracking the broad S&P 500 were up 0.8 percent in morning trading in Chicago, while those tracking the tech-heavy Nasdaq 100 rose 1 percent. The S&P had fallen 1.1 percent on Friday, the last trading day before Labor Day, wrapping up a third consecutive week of declines, as traders weighed the prospect of aggressive interest rate hikes from the Federal Reserve. and an increasingly dark economic outlook.
In currencies, the pound was up 0.7 percent against the dollar at $1.16, a day earlier. hovered near its weakest point in decades to $1.1444. The British pound has not traded at such weak levels on a regular basis since the mid-1980s.
Those moves on Tuesday hinted at a warmer, less risk-averse mood, after aggressive rhetoric from the Fed and a deepening European energy crisis sent chills through financial markets. Fed Chairman Jay Powell last month reiterated the central bank’s commitment to curb inflation, saying “they need to keep it up until the job is done.”
Markets are now pricing in the possibility of the Fed raising borrowing costs by 0.75 percentage point at its late-September meeting, which would mark the third consecutive increase of such magnitude. The central bank’s current target range is 2.25 to 2.50 percent.
The European Central Bank is due to deliver its own monetary policy decision on Thursday, with several Wall Street banks anticipating a whopping three-quarter point hike. The ECB raised rates in July for the first time in more than a decade by an unexpectedly large 0.5 percentage point.
The euro rose 0.2 percent on Tuesday to $0.995, paring steeper gains earlier in the session. Japan’s yen fell up 1.2 percent to ¥141.85 against the dollar, marking a decline of almost 5 percent over the past month, as Tokyo’s tight yield curve controls contrasted with surging yields from bonds in other major economies, which reduced the attractiveness of the national currency.
“The role of the yen as a safe haven has been eroded by Japan’s worsening trade position, and the [fall in the yen] it may have to go further until the Japanese authorities intervene,” ING analysts said.
In debt markets, the yield on the 10-year US Treasury bond rose 0.05 percentage point to 3.24 percent. The UK gilt equivalent yield traded flat at 2.95 percent. Ten-year UK government borrowing costs on the gold market soared more than 0.9 percentage point last month, the biggest increase since at least 1989.
“An interesting trend that we have observed in recent [sterling] The sell-off has been the simultaneous sell-off along with the UK gilt sell-off,” said Kamal Sharma, currency strategist at BofA Global Research.
Sharma said this was “unusual” for sterling because it had “historically been a rate-sensitive currency” and this “perhaps foreshadows some of the broader concerns we’ve had with sterling’s long-term fundamentals: a widening current account deficit and financing problems and increasing pressures on government finances in the context of greater stimulus plans”.
Stock and bond prices had fallen on Monday as markets reacted to Russia’s indefinite shutdown of the central Nord Stream 1 gas pipeline on Friday, a scenario that threatens to stoke inflationary pressures. Contracts tied to TTF, Europe’s wholesale gas price, had risen by more than a third on Monday. On Tuesday, TTF fell just over a tenth to €219 per megawatt hour.
In European stocks, the regional Stoxx 600 stock index gained 0.8 percent, while Germany’s Dax added 1 percent. London’s FTSE 100 rose 0.4 percent as incoming Prime Minister Liz Truss prepared to launch a package aimed at mitigating the impact of the energy crisis.