LONDON, Nov 24 (Reuters) – Stocks hit a two-month high and the dollar plunged to a three-month low on Thursday after Federal Reserve signals of fewer interest rate hikes from next month followed from Frankfurt’s message that the ECB will continue to plow.
With Wall Street closed for Thanksgiving, it was up to Europe to continue the rebound in market confidence that had been building for more than a month.
It looked like a bit of a struggle at first when FTSE London refused to budge, but there were enough gains in the rest of Europe and Asia overnight to ensure things keep going.
At lunchtime the MSCI 47-country world stock index (.MIWD00000PUS) was at its highest level since mid-September, while yields on German and UK government bonds, which drive Europe’s borrowing costs, had fallen to their lowest levels respectively from October to September.
“Federal Reserve minutes signaled that some sane voices are trying to drown out Fed Chairman Powell’s relentless ‘hike, hike, hike’ chorus,” said Paul Donovan, chief economist at UBS.
A “substantial majority” of Fed policymakers agreed that it would “probably be appropriate soon” to slow the pace of interest rate hikes, the minutes released Wednesday showed, although Donovan stressed there was still no sign of a effective shutdown and various Fed members thought rates might have to go “a little higher” than expected.
Futures markets show that investors now see US rates peaking at just above 5% by May and are pricing in a roughly 75% chance that the Fed now moves to 50 basis point hikes instead of the 75 basis points it has used recently.
Equivalent ECB minutes on Thursday showed its rate regulators fear inflation may now be entrenched in the euro zone.
“Incoming data so far suggests that room to slow the pace of interest rate adjustments remains limited, even as we are getting closer to ‘neutral’ rate estimates,” Isabel Schnabel, one of the most influential members of the committee, said separately. executive.
For currency markets, this meant a continuation of the 7-week dollar sell-off. /FRX
The euro surged as high as $1.0447, nearing its recent four-month high of $1.0481, as the dollar weakened 0.6% against the Japanese yen to 138.70 yen and cleared $ 1.20 against the pound.
“The dollar may be under pressure for a bit longer, but is probably now incorporating a good amount of Fed-related downside,” ING analysts wrote.
TURKEY ON THANKSGIVING
The Fed wasn’t the only target. The Swedish krona moved higher as its central bank raised its rates by three-quarters of a percentage point to 2.5% and reported more next year. Read more
Germany’s Ifo business climate index also rose more-than-expected, following some optimistic data from France as well, while Turkey surprised no one as it cut its interest rates another 150 basis points despite inflation staggeringly high of over 85%.
Turkey’s central bank said it has signaled the end of its cuts, however with next year’s presidential election creating doubts as to whether the lira has fallen to a new all-time low.
Overnight, Asian markets saw Japan’s Nikkei (.N225) and South Korean (.KS11) stocks both climb about 1%.
The Bank of Korea had reduced the pace of rate hikes to 25 basis points. In Japan, data showed that manufacturing activity contracted at the fastest pace in two years.
China’s real estate stocks (.HSMPI) also rose nearly 7% after local banks pledged at least $38 billion in new credit lines to cash-strapped developers, though the Shanghai Composite Index (.SSEC) lost 0.25% as the country’s COVID cases continued to soar.
In the oil market, prices were sliding towards a major support level established in September. If they breach it, oil could plummet to levels not seen since before the end of 2021.
Brent futures fell 0.3% to $85.13. U.S. crude futures fell 0.2% to $77.74 a barrel. They fell more than 3% on Wednesday as Group of Seven (G7) nations considered a price ceiling for Russian oil above the current market level.
Recession fears remain strong. Wednesday’s post-Fed US bond market moves saw 10-year bond yields fall to a whopping 79 basis point shortfall relative to two-year yields.
Such a curve reversal has not been seen since the dot-com crash of 2000 and, on the face of it, is a sign that investors are expecting a deep economic recession in the coming months.
Additional reporting by Stella Qiu in Sydney; Edited by Robert Birsel, William Maclean
Our standards: the Thomson Reuters Trust Principles.