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Market Stability Amidst Fed Disappointment

Global markets exhibited stability on Wednesday, albeit with a cautious undertone, following indications that U.S. interest rates might remain elevated for a prolonged period. This sentiment propelled Treasury yields to five-month highs and bolstered the dollar, as investors weighed the implications of Federal Reserve Chair Jerome Powell’s recent remarks.

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European shares managed modest gains of 0.2%, rebounding from a nine-month low driven by concerns over geopolitical tensions in the Middle East. Powell’s statement on Tuesday, citing sustained inflation pressures and the need for prolonged policy tightening, contributed to market apprehension.

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Market expectations for U.S. rate cuts have significantly diminished, with projections now indicating fewer than two cuts this year, a substantial shift from initial forecasts of up to six cuts. Although the first rate reduction is anticipated in September, confidence in this timeline has waned.

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Alexandre Marquis, senior portfolio manager at Unigestion, noted that markets had already priced in reduced expectations for rate cuts, mitigating some of the disappointment. However, ongoing tensions between Iran and Israel continued to temper risk sentiment.

The MSCI world equity index remained flat, while U.S. stock futures edged lower following Tuesday’s decline on Wall Street. The dollar remained stable, exerting pressure on the Japanese yen, which hovered near multi-decade lows.

Treasury yields, particularly the two-year and 10-year benchmarks, maintained upward momentum, reflecting diminishing prospects of Fed easing. Euro zone bond yields also climbed to 1-1/2-month highs, with Germany’s 10-year yield rising by 0.3 basis points.

In Asia-Pacific markets, shares outside Japan rebounded, partially recovering from recent losses. Taiwanese shares notably outperformed, buoyed by gains in chip-making giant Taiwan Semiconductor Manufacturing Co.

The International Monetary Fund’s projection of slow yet steady global economic growth underscored prevailing uncertainties, including lingering inflationary pressures and geopolitical tensions. Heightened tensions in the Middle East, particularly between Israel and Iran, added to market apprehensions.

The dollar index held steady, while the New Zealand dollar gained ground following stronger-than-expected first-quarter inflation data. Meanwhile, oil prices retreated amid demand concerns despite escalating tensions in the Middle East. Gold, typically considered a safe-haven asset, experienced a slight decline from recent highs.

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