Stocks, bonds extend rally on hopes rate hikes ease
By THE STAR STAFF
Equities rose and bonds rallied around the world on Wednesday as investors headed into the new year with cautious optimism after a brutal 2022 and hopes of encouraging inflation data that rate hikes may be less aggressive than feared.
The pan-European STOXX 600 was up 1.15% by 11:30 GMT as lower inflation reads from France boosted sentiment and built on positive data from Germany earlier in the week.
Eurozone government bonds also extended their rally from the first two trading days of 2023, with the benchmark German 10-year government bond yield slipping 10 basis points on signs central banks were making progress in fighting inflation.
The 10-year Treasury yield fell to 3.6809% and the 2-year Treasury yield, which normally moves in step with interest rate expectations, slipped 6 basis points to 4.3409%.
MSCI’s broadest index of Asia-Pacific stocks outside of Japan was 1.69% higher and was expected to rise for the third straight day this year after falling 20% in 2022, its worst performance since 2008.
The modest recovery in stocks and bonds showed optimism about two of the factors that made 2022 such a hell of a year for investors, namely the steady rise in interest rates to fight inflation and China’s anti-COVID lockdown measures.
But jitters in other assets showed the road ahead will be far from smooth as policymakers try to balance encouraging economic growth with curbing inflation.
Oil prices fell sharply as concerns about global demand persisted amid signs of slowing activity in key growth drivers such as the US, Europe and China.
“Fresh warnings about the impact of aggressive rate hikes on the US economy have unsettled traders again as oil prices continue their downward trend,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
US crude fell 2.5% to $75.03 a barrel, while Brent was at $80.09, down 2.42% on the day.
Positive market momentum in equities on Wednesday was a prelude to a key data release that could shift momentum back in the other direction.
Minutes of the US Federal Reserve’s December meeting, which warned interest rates may have to stay higher for longer, will be released at 1900 GMT. Investors will analyze the minutes to see if further policy tightening is likely, as well as scan data on US jobs around 1500 GMT.
“The market has started the year quite tentatively…(and) is still struggling to imagine what we’re going to see from the Fed this year,” said Rob Carnell, head of Asia Pacific research at ING.
“There are two camps out there and they are fighting for supremacy in terms of the prospect. Some days the higher camp wins for a longer period of time, some days the higher camp wins over the lower camp,” said Carnell.
US stocks, which started the year more hesitantly amid sharp falls in key stocks like Tesla, appeared to open with modest gains. E-mini futures for the S&P 500 were up 0.44%.
The US Federal Reserve said last month, as it hiked interest rates by 50 basis points, terminal rates may need to stay higher longer to fight inflation.
However, markets are pricing in rate cuts in late 2023, with Fed Fund futures implying a 4.25% to 4.5% range through December.
Hopes of less aggressive rate hikes buoyed underperforming gold, with spot prices for the precious metal hitting $1,858 an ounce by 1148 GMT, the highest since mid-June.
Meanwhile, the dollar index, which measures the greenback against six other currencies, fell 0.6% as commodity currencies like the Australian dollar rallied and the euro rose on positive French and German inflation data.
Sterling was last seen at $1.2055, up 0.74%, while the euro was up 0.6% at $1.0610, hitting a three-week low of $1.0519 overnight.