Banks were dominating the FTSE 100 risers after hawkish comments from the head of the US central bank overnight.
It was already clear that interest rates were going to continue rising, as central banks try and deal with soaring inflation, but comments in a speech by US Federal Reserve chair Jerome Powell have suggested the increases could come more quickly than previously expected.
Powell sounded said inflation is "much too high" and opening the door to more aggressive hikes of at least 50 basis points.
“We will take the necessary steps to ensure a return to price stability,” he said. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”
It put a stop to the rally in US growth stocks, with the tech-powered Nasdaq having spent last week recovering from the 14-month lows reached on the back of the war in Ukraine but stalling overnight.
In London by lunchtime, HSBC Holdings PLC (LSE:HSBA) shares were 3.5% higher, NatWest Group PLC was up 3%, Standard Chartered PLC climbed 2.8% and Lloyds Banking Group PLC was lifted 2.5%.
Also surging, were US government bond yields, with the 10-year US Treasury yield stands at 2.33%, its highest level since May 2019, but that is still miles below the prevailing rate of inflation of 7.9%.
Stock market investors now "need to seriously think about whether it is time to be frightened or not,” said Russ Mould, investment director at AJ Bell.
“Benchmark 10-year yields are still way below the prevailing rate of inflation, to suggest that fixed-income investors either don’t believe in the US Federal Reserve’s apparent new-found resolution to tighten monetary policy or fear that a recession will strike first and force the American central bank to quickly backtrack (again)."
Reading the runes of the US yield curve, Mould said holders of US Treasuries seem to be "far from convinced" that the central bank will follow through on its threats of faster interest rate rises, and carry out quantitative tightening from May onwards.
Bond yields are closely hugging the five-year, five-year forward inflation expectation of 2.3% rather than actual readings of inflation as policy still remains ultra-loose in most major economies, with the Fed is still running the second-lowest base rate in its history and the biggest balance sheet in its history.
The Fed’s "calling wolf is ...failing to convince", said Mould, which with the Fed moving pretty ponderously, in line with Powell's initial analysis that inflation was transitory, suggests deep down fixed-income investors "think that inflation will fizzle, as the best cure for high prices proves to be high prices and consumers and corporations simply buy less".
With the post-lockdown surge in demand eventually petering out, with tax breaks and fiscal stimulus simultaneously being taken away, the bond market is close to giving what is often seen as a classic warning of recession, says Mould, namely an inverted yield curve.
This means the difference between 2-year and 10-year bonds is at its flattest since February 2020 as the pandemic first began to flare up.
While the yield curve is far from an infallible indicator, "stock market investors should take heed, as inverted yield curves tend to suggest there is trouble ahead for the S&P 500 index", said Mould, with the signal having forewarned of economic downturns in 2000, 2007-08 and again in 2020, all of which were followed by falls of at least 20% in the US stock market.