US equity futures pared gains on Tuesday and a rebound in European stocks proved short-lived, suggesting markets aren’t out of the woods after a rout driven by expectations of sharper Federal Reserve interest-rate hikes to fight inflation.

S&P 500 contracts came off session highs to trade around 0.6%, signaling some relief after Monday’s plunge that erased $1.3 trillion in market capitalization and sent the gauge into a bear market. Futures on the Nasdaq 100 climbed about 0.9%. The dollar was steady near a two-year high and Treasuries held gains after the 10-year yield had soared to a peak last seen in 2011. The yield curve remained flat, however, underscoring worries about an economic downturn sparked by tighter monetary policy.

This quarter is set to deliver the biggest combined loss for global bonds and stocks on record, in data going back to 1990. The highest inflation in a generation, stoked by supply-chain and commodity-market disruptions amid China’s Covid struggles and the war in Ukraine, is roiling the outlook. The big question is whether the Fed and other major central banks will tip their economies into recession as they tighten financial conditions.

“We remain bearish on equity outlook,” said Marija Veitmane, a senior strategist at State Street Global Markets. “Inflation is still a huge problem and central banks need to be very aggressive to fight it. This is a very negative outlook for stocks, so we would be sellers of any rally.”

Traders now see about 200 basis points of tightening by the Fed’s September decision and the possibility of a 75 basis-point hike. They expect the overnight rate to peak at 4% by mid-2023. Bets on an outsize Fed move hardened following a Wall Street Journal report suggesting the larger increment was now in play. Some commentators even floated the idea of a 100 basis-point hike.

Speculative investments have suffered in the risk-asset selloff. Bitcoin slid as much as 10% to around $21,000 before paring most of the retreat.

In Japan, the central bank boosted bond-purchase operations to keep yields in check. The yen hovered near a 24-year low against the greenback.

On the commodity front, oil held above $120 a barrel as investors evaluated a tight supply outlook and the impact of China’s eventual return from virus curbs.

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