Stocks Slip as Yields Rise, China Optimism Fades: Markets Wrap

(Bloomberg) — Early optimism on moves by China to further ease Covid restrictions faded, as the path of American rate policy stifled potential gains in European equities and US futures.

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The Stoxx Europe 600 Index ticked lower while contracts on the S&P 500 retreated 0.4%. Treasury yields climbed, lifting the dollar into positive territory.

A hotter-than-expected US jobs report last week along with a jump in average hourly earnings point to fresh inflation risks unsettling traders.

At the same time, dovish Fedspeak has tempered the move in yields. Friday’s payrolls data boosted wagers on where US rates will top out in the current tightening cycle without undoing bets on the size of next week’s rate hike, which still call for 50 basis points of tightening.

“We still think Treasuries have no business in trading in the 3.5% area if the Fed is about to hike rates to almost 5%,” ING Groep NV strategists including Antoine Bouvet wrote in a note.

Morgan Stanley strategists expect the S&P 500 to resume declines after the index crossed above its 200-day moving average last week, saying the downtrend since the beginning of the year remains intact.

Michael Wilson, one of the US stock market’s most vocal skeptics, said investors are better off booking profits.

Read more: Morgan Stanley’s Michael Wilson Is a Stock Market Seller Again

Asian equities rose after Chinese authorities eased Covid testing requirements across major cities over the weekend as Beijing appears to be engineering a gradual shift away from its strict Covid Zero policy amid elevated cases and public protests.

Commodities also advanced on the prospect of more demand from China. Oil, iron ore and copper climbed.

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“The damage being done to the Chinese economy in general, the longer the aforementioned Covid restrictions stay in place, is clear to see,” Simon Ballard, chief economist at First Abu Dhabi Bank, wrote in a note to clients. “China now desperately needs policies to bolster the labour market and help to underpin domestic demand.”

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