US stock futures and UK pound rise as investor sentiment brightens

US stock futures turned higher on Tuesday and the euro and sterling bounced, in a sign of improving sentiment after several days of volatile trading.

Contracts tracking the broad S&P 500 gauge rose 0.8 per cent in morning dealings in Chicago, while those tracking the tech-heavy Nasdaq 100 rose 1 per cent. The S&P had fallen 1.1 per cent on Friday — the last trading day before Labor Day — concluding a third straight week of declines, as traders assessed the prospect of aggressive Federal Reserve interest rate rises and a darkening economic outlook.

In currencies, the pound popped 0.7 per cent against the dollar to $1.16, having just a day earlier hovered near its weakest point in decades at $1.1444. Sterling has not traded at such weak levels on a regular basis since the mid-1980s.

Those moves on Tuesday hinted at a warming, less risk-averse mood, after hawkish rhetoric from the Fed and a deepening European energy crisis sent shivers through financial markets. Fed chair Jay Powell reiterated last month the central bank’s commitment to curbing inflation, saying they “must keep at it until the job is done”.

Markets are now pricing in the possibility of the Fed raising borrowing costs by 0.75 percentage points at its late-September meeting, which would mark the third consecutive increase of such magnitude. The central bank’s current target range stands at 2.25 to 2.50 per cent.

The European Central Bank will on Thursday deliver its own monetary policy decision, with multiple Wall Street banks anticipating a jumbo three-quarter-point increase. The ECB raised rates in July for the first time in more than a decade by an unexpectedly large 0.5 percentage points.

The euro rose 0.2 per cent on Tuesday to $0.995, trimming sharper gains earlier in the session. Japan’s yen fell as much as 1.2 per cent to ¥141.85 against the greenback, marking a decline of almost 5 per cent over the past month, as Tokyo’s strict yield curve controls contrasted with soaring bond yields in other major economies — lessening the appeal of the nation’s currency.

“The yen’s role as a safe haven has been eroded by Japan’s worsening trade position, and the [fall in the yen] may have further to go until Japanese authorities intervene,” said analysts at ING.

In debt markets, the yield on the 10-year US Treasury note rose 0.05 percentage points to 3.24 per cent. The equivalent UK gilt yield traded flat at 2.95 per cent. Ten-year UK government borrowing costs in the gilt market had soared more than 0.9 percentage points last month, the biggest rise since at least 1989.

“An interesting trend that we have observed in the latest [sterling] sell-off has been the simultaneous sell-off in conjunction with the UK gilt sell-off,” said Kamal Sharma, foreign exchange strategist at BofA Global Research.

Sharma said this was “unusual” for sterling because it had “historically been a rate-sensitive currency” and this “perhaps portends to some of the broader concerns that we have had with long-term sterling fundamentals: a widening current account deficit and the issues in funding and increasing strains on government finances against the backdrop of plans for more stimulus”.

Stocks and bond prices had slipped on Monday as markets reacted to Russia’s indefinite closure of the pivotal Nord Stream 1 gas pipeline on Friday, a scenario that threatens to stoke inflationary pressures. Contracts linked to TTF, Europe’s wholesale gas price, had climbed more than a third on Monday. On Tuesday, TTF slipped by just over a tenth to €219 per megawatt hour.

In European equities, the regional Stoxx 600 share index gained 0.8 per cent while Germany’s Dax added 1 per cent. London’s FTSE 100 edged 0.4 per cent higher as incoming prime minister Liz Truss prepared to launch a package aimed at dulling the impact of the energy crisis.

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