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U.S., European shares rise on hopes Fed will slow rate hike pace

The dollar weathered another suspected Japanese intervention to rise against the yen.


The Dow Jones Industrial Average rose 346.66 points, or 1.12%, to 31,429.22, the S&P 500 gained 33.7 points, or 0.90%, to 3,786.45 and the Nasdaq Composite added 37.59 points, or 0.35%, to 10,897.31 by 12:43 p.m. EDT (1643 GMT).


The tech-heavy Nasdaq recovered after earlier taking a hit by a slide in Tesla Inc and other megacap stocks.


Tesla dropped after it cut starter prices for its Model 3 and Model Y cars by as much as 9% in China, indicating signs of softening demand in the world’s largest auto market.


U.S. business activity contracted for a fourth straight month in October, a survey showed, in the latest evidence of an economy softening in the face of high inflation and rising interest rates.


“Investors are getting more confident that inflation is going to come down and that the Fed might be quick to pause. The effects of the first few rate hikes will start to be felt in the next couple of months and markets are trying to get ahead of when the Fed will hit the pause button,” said Edward Moya, senior market analyst at OANDA in New York.


“The flash PMIs showed significant weakness across both the service and manufacturing parts of the economy, which is good news for investors expecting the Fed to pause early next year.”


The dollar advanced to 149.70 yen in early trade before hastily retreating to 145.28 in a matter of minutes in what traders and analysts said appeared to be in response to activity by the Bank of Japan. It was last at 148.840.


Japan likely spent a record 5.4 trillion-5.5 trillion yen ($36.16 billion-$36.83 billion) in its yen-buying intervention last Friday, according to estimates by Tokyo money market brokerage firms. Japanese authorities did not confirm whether or not there had been intervention.


Any action to support the yen runs counter to the BOJ’s commitment to controlling Japanese government borrowing costs and could increase the pressure on it to step back on yield curve control at its policy meeting this week.


Sterling, meanwhile, seesawed in volatile trade on news Boris Johnson had dropped out of the running for British prime minister.


Former finance minister Rishi Sunak will become Britain’s next prime minister after he won the race to lead the Conservative Party, which could reduce some of the political uncertainty hanging over the pound.


Sterling was last trading at $1.12620.


“The day-to-day is tricky. My favourite expression on all of it this morning is this is a time to be a poker player, not a chess player. It’s all about positioning and sentiment and understanding who you’re playing against,” Societe Generale strategist Kit Juckes said.


European shares rose on Monday, driven by hopes that the Federal Reserve could slow its pace of interest rate hikes, while investors braced for a busy week of earnings and key interest rate decision from the European Central Bank. [.EU]


The continent-wide STOXX 600 index rose 1.14%.


Markets are still priced for a rate rise of 75 basis points next month, but have scaled back bets on a matching move in December. The peak for rates has also edged down to around 4.87%, from above 5% early last week.


Fed officials, including San Francisco Fed President Mary Daly and St Louis chief James Bullard, indicated that the pace of tightening would be at the heart of any policy debate at November’s meeting.


“What this means for the markets is that the rates and FX markets could now become more sensitive to incoming economic data and any evidence of financial market stress,” MUFG head of research Derek Halpenny said.


Chinese blue chips slid almost 3%, while Hong Kong shares fell 6.4%, their biggest one-day drop since the financial crisis. The offshore yuan hit another record low against the dollar after Xi Jinping secured a precedent-breaking third leadership term, picking a top governing body stacked with loyalists. Xi is likely to stick to his zero-COVID policy that is damaging growth, analysts say.


Delayed data on gross domestic product (GDP) showed the Chinese economy grew 3.9% in the third quarter, above forecasts for 3.5%, but retail sales disappointed, with a rise of 2.5%.


Investors will get a look at U.S. GDP on Thursday and core inflation measures a day later. The economy is forecast to have grown an annualised 2.1% in the third quarter.


The European Central Bank meets this week and is widely expected to raise rates by 75 bps.


The euro last traded at $0.98640, having briefly been as high as $0.9899 early in the session.

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