Wobbling bonds find a level as Fed meets

A sharp jump in yields on U.S. Treasuries, German bunds and Japanese government bonds on Monday was fueled by a slew of factors - some hawkish policy noises from several regions, another heavy week of year-end U.S. debt sales and a likely Bank of Japan interest rate rise next week.

The jolt knocked stock markets back and the S&P 500 ended in the red on Monday. Stock index futures held steady on Tuesday.

But as a widely expected Fed cut is expected on Wednesday, the picture calmed a bit overnight. The release of October data on U.S. job openings later is likely the last significant labor market update before the central bank decides, with some $39 billion of 10-year Treasury notes under the hammer today too.

The latest shakeout in global bonds on Monday was worldwide.

European Central Bank board hawk Isabel Schnabel helped push long-dated German yields to 14-year highs by saying the next move in ECB rate will eventually be higher, Fed Chair hopeful Kevin Hassett pointedly did not call for sharp interest rate cuts as he has done previously and the Reserve Bank of Australia overnight ruled out further rate cuts there.

Currencies remained relatively steady, however. The dollar was a touch firmer against the yen and euro overnight, but softer against China's yuan and the Aussie dollar.  

Back on Wall Street, the focus was on the bidding war for Warner Bros. Discovery, with Paramount Skydance launching a hostile move worth $108 billion in a last-ditch effort to outbid Netflix. Shares of Paramount were up 7.3% on Monday, Warner Bros Discovery rose 5.3% and Netflix fell 4%.

In an interesting week for Big Tech, with Oracle and Broadcom results due, AI chip giant Nvidia rose 2% out of hours after President Donald Trump said the United States will allow its H200 processors, its second-best AI chips, to be exported to China and collect a 25% fee on such sales.

But the European Commission said on Tuesday that Alphabet's Google faces an EU antitrust investigation into its use of web publishers' online content and YouTube videos to train its AI models.

European Central Bank hawks determined to resist further interest rate cuts are starting a drumbeat for future tightening by conjuring up a new specter: passive policy easing.

ECB board member and renowned hawk Isabel Schnabel spooked the bond market on Monday by saying the next move in euro interest rates is more likely to be up - even if not on the immediate horizon. Her reasoning was eye-catching: leaving rates unchanged for too long would, by osmosis, amount to an unwarranted loosening of monetary policy.    

In other words, the ECB would need to track a likely rise in euro zone's long‑run "neutral" interest rate just to keep the economy on an even keel and policy in its much‑prized "good place".

Graphics are produced by Reuters.

Graphics are produced by Reuters.

Chinese exports to the United States dropped 29% year-on-year in November, while exports to the European Union grew an annual 14.8%. Shipments to Australia surged 35.8%, and the fast-growing Southeast Asian economies took in 8.2% more goods over the same period. Tumbling exports to the U.S. came despite news that the world's two biggest economies had agreed to scale back some of their tariffs after U.S. President Trump and Chinese President Xi Jinping met in South Korea in late October. The average U.S. tariff on Chinese goods stands at 47.5%, well above the 40% threshold that economists say erodes Chinese exporters' profit margins.

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