US shares are rallying, including the heavily sold-down tech sector, despite indications from the US Federal Reserve chair that the withdrawal of extraordinary stimulus may be relatively rapid.
- US Federal Reserve chair Jerome Powell appeared before the Senate overnight
- Markets were boosted by his comments indicating that the Fed would probably not start reducing its bond holdings until later this year
- However, Mr Powell indicated US interest rates are likely to rise soon to counter high inflation
The market is generally pricing in the US central bank's first rate rise in March, as it winds up its latest bond-buying stimulus program.
Fed chair Jerome Powell's confirmation hearing testimony to the Senate did little to alter those expectations, although he did note it might take longer for the central bank to wind down its holdings of bonds.
"Wall Street now has a better understanding on how the Fed will normalise policy and with the balance run-off likely taking up to four meetings," OANDA's senior market analyst, Edward Moya, said.
"After Powell's testimony, some investors feel they got the all-clear signal to buy the dip."
When the Fed does start allowing its holdings of bonds to shrink, that will effectively put further upward pressure on market interest rates, along with the halt to new bond purchases and cash-rate increases.
US bond yields eased very slightly on expectations that this process of allowing the Fed's balance sheet, largely these bond holdings, to shrink would not start happening until the middle of this year.
However, Mr Powell was clear that the Fed was focused on inflation, with figures out this week expected to show that year-on-year price rises in the US hit 7 per cent, the highest level in around four decades.
"If we have to raise interest rates more over time, we will," Mr Powell told the Senate committee.
"We will use our tools to get inflation back."
Mr Powell added that, with unemployment back below 4 per cent and Omicron disruptions expected to be temporary, he believed the US economy was well placed to continue growing in the face of rising interest rates.
Battered tech stocks rebound
After initial falls, US shares gained as investors cherrypicked the positives out of Mr Powell's testimony.
"Today I thought that he was more moderate than the general tone of the [Federal Reserve meeting] minutes [released last week] — and I think that's why you're seeing the dollar a little weaker and the stocks up near their highs," said Lou Brien, market strategist at DRW Trading.
The tech-heavy Nasdaq, which has been brutally sold off at the start of 2022, was a particular beneficiary.
It was up 1.4 per cent to 15,153 points at the close.
The broader S&P 500 was 0.9 per cent higher at 4,713 and the blue chip Dow Jones Industrial Average was 0.5 per cent higher at 36,252.
Eight of the 11 major S&P 500 sectors rose, with growth-heavy sectors like technology and consumer discretionary contributing the most to the S&P's gains.
The biggest percentage gainer was energy, which rose along with crude oil futures.
Megacap growth companies, including Apple (+1.7pc) and Amazon (+2.4pc), were the biggest single-stock boosts to the S&P 500.
"The market is extremely in tune to the Treasury yield move right now," Matt Miskin, co-chief investment strategist at John Hancock Investment Management, told Reuters.
"As yields have started to slow down their ascent, that's providing support for technology related stocks.
"There weren't any real surprises to Powell's comments which perhaps is adding some stability."
While Mr Miskin saw some signs of a risk-on market on Tuesday, he said investors were also "tiptoeing around" as they waited for key inflation data, which is due out on Wednesday.
Australian shares were also set to open strongly higher on a sudden increase in risk appetite. The ASX SPI 200 futures index was up 0.9 per cent to 7,356.
The Australian dollar also benefited from the positive vibes, rising to 72.1 US cents by 8:20am AEDT.