Traders struggle to recover from selloff as Fed rate fears linger

HONG KONG, China  -While the fallout from Fitch’s US debt rating downgrade settled, profit-taking and rising Treasury yields kept pressure on investors heading into what is considered a less appealing time of year for equities.

The ratings agency’s decision to lower Washington’s gold-plated AAA classification rattled markets, fueling a race out of riskier assets, though analysts said there was unlikely to be much long-term impact from the move.

Still, traders were struggling to get back in the saddle — having enjoyed a strong run-up in recent weeks — as they reassess what some consider to be too-high valuations and the outlook for the US economy.

Data from private payrolls firm ADP showing companies created 324,000 new jobs last month — smashing forecasts of 190,000 — suggested the labor market remained tight.

That jolted optimism that the Fed might have announced its last rate hike in July, as a string of recent reports showed inflation continuing to fall and parts of the economy appearing to slow.

READ: Fed’s last rate hike coming at July meeting, economists say

The news sent 10-year US Treasury yields to their highest point since November, which was also blamed on the Treasury selling more bonds than expected in an auction.

The so-called VIX “fear gauge” hit levels not seen since May.

Wall Street’s three main indexes all tanked, with the Nasdaq shedding more than two percent as tech firms are more susceptible to higher rates.

READ: Wall Street ends down, investors step back after Fitch US rating cut

And the selling seeped into Asia, though some markets swung through the morning.

Tokyo gave up more than one percent, while Shanghai, Sydney, Seoul, Wellington were also off. However, there were gains in Hong Kong, Singapore, Manila and Jakarta.

Stephen Innes of SPI Asset Management said the next few weeks would be uncertain on trading floors as investors weigh their options after the recent healthy gains.

“As we approach the typically calmer summer season for markets, investors are discussing whether it’s better to expect a renewed surge in risky investments in the next few weeks or to prepare for a potentially significant decline if the data disappoints,” he wrote.

“And this is due to the high level of optimism already reflected in the current prices.”

“Although some technical indicators skew caution, such as sentiment measures appearing stretched, the overall macro outlook is still favorable for risk-taking. Additionally, (consumer price) inflation is widely expected to decrease in the next week’s data release, supporting the positive macro scrim.”

Focus is now on the release of US payrolls figures due Friday, which will be closely watched for an idea about the Fed’s next moves, with observers warning a strong print could ramp up bets on another rate hike.

And later Thursday, the Bank of England is tipped to announce a 14th increase as Britain struggles to bring down inflation — the highest in the G7 — amid a cost-of-living crisis.

READ: Bank of England set to raise rates for 14th time in a row