Shares and bonds stabilise on pause in bad news

© Reuters. A man looks at an electronic board displaying Japan's Nikkei index outside a brokerage in Tokyo, Japan August 29, 2022. REUTERS/Kim Kyung-Hoon

By Lawrence White

LONDON (Reuters) - Shares tiptoed higher and Eurozone bond yields fell on Tuesday as investors took a breather ahead of the next round of likely gloomy inflation data while also juggling concerns about Europe's energy crisis, a looming recession and more rate hikes.

The pan-European STOXX index, MSCI's broadest index of Asia-Pacific shares outside Japan and S&P futures all rose around 0.7% as markets recovered from a round of selling triggered by hawkish remarks by Federal Reserve Chair Jerome Powell at the Jackson Hole conference last week.

Euro zone government bond yields fell as markets calmed following dramatic action on Monday when European Central Bank board member Isabel Schnabel 's warning about rising inflation sent bond yields spiking up 12 to 20 basis points.

Global markets are extremely sensitive to such hawkish comments from key policymakers at the moment, as they hope for a pivot to looser policies that might mitigate the euro area's grim economic outlook.

Germany's 10-year yield last traded at 1.443%, down 5 basis points on the day but close to the two-month high reached on Monday of 1.548%.

While markets paused for breath on Tuesday, longer term worries remain as policymakers battle to contain rising prices worldwide with rate hikes that risk exacerbating economic pain.

"One thing is clear: a recession in Europe looks all but inevitable, and the only question is how long and how severe it will be," Frederik Ducrozet and Axel Roserens of Pictet Wealth Management wrote on Tuesday.

Emerging markets currencies and stocks nonetheless took stock of the relative absence of fresh bad economic news and data on Tuesday to stage a modest recovery from recent lows.

South Africa's rand rose 0.5% as did the Mexico's peso, while the Indonesia rupiah and the Indian rupee led gains in Asia.

FORCEFUL ACTION

At the Jackson Hole conference, the Fed's Powell and ECB speakers flagged the need for forceful action to tackle inflation, driving selling of bonds and equities as traders jacked up near-term interest rate expectations.

"Investors looking for market salvation from a Fed pivot didn't get it at the Fed's travelling show in Jackson Hole," said Jason Darho, head of asset allocation for the Americas at UBS Global Wealth Management.

"Instead, investors should expect the market regime of high volatility and range-bound trading to persist for a while longer.”

Futures markets have odds of better than two-thirds that the ECB raises rates by 75 basis points in September, and see about a 70% chance that the Fed does likewise.

U.S. non-farm payrolls data are due on Friday, and markets may not like a strong number if it supports the basis for a continuation of aggressive rate hikes.

Ahead of that, German inflation figures due at 1200 GMT on Tuesday and China's manufacturing survey due on Wednesday will be closely watched.

U.S. Treasuries settled down on Tuesday morning. The two-year yield fell to 3.4048%, after rising as high as 3.489% on Monday, its highest since late 2007.

Benchmark 10-year yields also fell to 3.0596%, down from 3.13% on Monday.

The U.S. dollar steadied after an overnight dip, though the euro was attempting to regain parity, helped by ECB hike bets and a cooling of gas prices. [FRX/]

The dollar index, which measures the currency's value against a basket of peers, edged down to 108.45, not far from the two decade peak of 109.48 it made a day earlier. The dollar traded at $0.9999 per euro and bought 138.52 yen.

Rodrigo Catril, a strategist at National Australia Bank (OTC:NABZY), said the euro would be tested by the upcoming inflation numbers in the eurozone, jobs data in the United States and Russian cuts to gas flows later in the week.

"The European story is actually all about the economic outlook... No energy means no growth," he said, adding it would not be a surprise if the euro fell back to $0.96.

Oil prices tumbled on fears that an inflation-induced weakening of global economies would soften fuel demand, and as Iraqi crude exports have been unaffected by clashes there.

Brent crude futures for October settlement fell $4, or 3.83%, to $101.07 a barrel by 1122 GMT, after climbing 4.1% on Monday, the biggest increase in more than a month.

Gold prices fell slightly as the precious metal continued to wilt in the face of the strong dollar, with spot gold last traded at $1,733.69 per ounce.