Fed’s rate hike, Treasury yields drop

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Fed’s rate hike, Treasury yields drop

The NYSE in New York has traders working on the floor.

Market reaction after the U.S. Federal Reserve's 50 basis-point interest rate rise was a classic case of buy and sell the dollar weakened, Treasury yields declined across the board and U.S. stocks rose by almost 3%, its biggest rise in two years.

The Fed's rejection of even bigger 75 bps rate rises going forward was the immediate trigger. But all said and done, the U.S. interest rates will go up by nearly 2 percentage points by the end of the year, and raises questions about the outlook for U.S. equities.

Asian markets took their cues from Wall Street on Thursday. After a private sector survey showed a 1% decline in the country's services sector, the Hong Kong tech shares index is up more than 1%, and the People's Bank of China pledged to give policy support to help the economy.

On Wednesday, the Fed's signal eschewing 75 bps moves allowed rate sensitive two-year Treasury yields to close 13 bps lower, which allowed rate sensitive two-year Treasury yields to close 13 bps lower on Wednesday. Australian and German short-dated yields were lower on the day, as a result of that move.

It's been a big week in central banking, and now after the Fed, the Reserve Bank of Australia and an unscheduled rate hike from India, all eyes are on the Bank of England.

The Fed's decision was relatively straightforward, but its counterpart in London has a trickier job at hand, trying to balance soaring inflation with growth risks caused by a cost-of-living squeeze.

Money markets have a good chance of a quarter-point hike to 1% on Thursday, but a poll by the Reuters of economists shows some uncertainty about the future rate hike path.

Oil prices rallied by as much as 5% on Wednesday on the news of a European Union ban on Russian oil. China's PMI is a dampener.

Key developments that should give more direction to markets on Thursday: