Investors unwind the reflation trades

Investors’ risk appetite had faded midweek after Federal Reserve officials gave the clearest signals yet that they plan to gradually pull back the monetary policies that helped propel markets to record highs. Their median projection showed they see lifting their benchmark rate by the end of 2023, sooner than previously forecast.

The S&P 500 ended Thursday down 1.84 points, or 0.04%, to 4221.86. The Dow Jones Industrial Average declined 210.22 points, or 0.62%, to 33823.45 for its fourth straight session of declines. The Nasdaq Composite rose 121.67 points, or 0.87%, to 14161.35, boosted by gains among technology stocks.

Treasury yields held a slide spurred by speculation while investors were unwinding bets on a steeper curve, after Federal Reserve officials signalled monetary-policy tightening could start sooner than previously thought, helping to rein in the risk that inflation might get out of hand.

The 30-year bond yield fell as much as 16 basis points to 2.05% Thursday. That dynamic also saw the yield curve, as measured by the gap between the 5- and 30-year debt yields, driven to as little as 117 basis points, a level unseen since November.

European equities declined, snapping their longest record-setting streak since 1999, after the U.S. Federal Reserve officials were more hawkish than expected, speeding up their pace of policy tightening. However, the Thursday session ended on a mixed note. DAX gained 0.11% and CAC 40 rose by 0.20%, while FTSE 100 dropped by 0.44%.

Bunds, Italian bonds are little changed with the focus on Treasuries after the aggressive post-Fed flattening move and in the absence of data and ECB speakers.

Germany’s 10-year yield, the benchmark for the euro area, was little changed at -0.19%. The Italian and French 10-year bond yields both moved +1 basis points to 0.83% and 0.17%.

Asian stocks drifted with the U.S. and European futures on Friday after a rally in technology shares and Treasuries on Thursday, as investors unwound some of this year’s dominant reflation trades. Equities saw modest gains in Hong Kong and Australia, and slipped in Japan after a central bank meeting. In China, shares pared a retreat as U.S. regulators proposed a ban on products from Huawei Technologies Co. and four other Chinese electronics companies.

Oil prices fell for a second straight session on Friday as the U.S. dollar soared on the prospect of interest rate hikes in the United States, but they were on track to finish the week as little changed and only slightly off multi-year highs.

Brent crude futures were down 47 cents, or 0.6%, at $72.61 a barrel as of 0551 GMT, extending a 1.8% decline on Thursday. U.S. West Texas Intermediate (WTI) crude futures were down 39 cents, or 0.6%, at $70.65 a barrel, after retreating 1.5% on Thursday.