World shares rose while the dollar and bond market borrowing costs held steady on Thursday, ahead of key U.S. inflation data that will feed the hotly-contested debate on where global interest rates are now heading.
The week’s sharp escalation of Middle East tensions ensured the mood remained cautious although Europe’s shares shuffled to a 3-week high after a 1.75% jump by Tokyo and 2% leap in Hong Kong had helped Asia do the same overnight.
Wall Street futures were pointing to a fifth straight day of gains for the first time since June too, while the dollar was hovering near a two-week low after Fed meeting minutes on Wednesday had shown caution emerging among its rate setters.
News that Central Huijin Investment, a Chinese state fund, raised stakes in the country’s big four banks had also boosted confidence in the broader Asian market as Hong Kong’s heavyweight Hang Seng index jumped 2.0%.
China, however, has also issued a notice prohibiting domestic brokerages and their overseas units from taking on new mainland clients for offshore trading, which will restrict capital outflows, Reuters reported on Thursday.
The recent buoyancy in markets also owes much to comments from Federal Reserve officials suggesting U.S. interest rates – which tend to drive global borrowing costs – may have finally peaked.
Fed Governor Christopher Waller on Wednesday said higher market interest rates may help the Fed slow inflation and allow the central bank to ”watch and see” if its own policy rate needed to rise again or not.
Waller has been among the most vocal advocates for higher interest rates to fight inflation, and his view added weight to similar statements this week by Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan.
European trading saw the dollar drifting near a two-week low, but the yen was still under pressure at 149.15 per dollar, just a whisker away from the 150 level that could spur intervention from Japanese authorities.[FRX/]
The minutes of this month’s ECB meeting showed the decision to hike its interest rates again had been a close call, although the euro barely budged on the news.
Capital Economics markets analyst Jonathan Petersen said the dollar’s broad-based rise against most currencies this year left it ”somewhat overvalued” and most other G10 currencies ”undervalued”.
”We expect the greenback to stay strong as the U.S. and other developed markets slip into recession, and gradually weaken after that,” Petersen said.
Inflation Watch
Rates markets cut the chance of a Fed hike in November to just 9%, down from just over 13% on Wednesday, and there is a 70% chance that the rate is already at its peak, according to CME FedTool.
With the long-awaited pivot for the Fed in sight, traders are bracing for the all-important U.S. consumer inflation report later. Stakes are even higher than usual after producer price inflation came in hotter than expected on Wednesday.
Economists expect the headline consumer price index (CPI) to haven risen 0.3% in September on a monthly basis, slowing from 0.6% in August. Core CPI is seen holding steady at 0.3%.
Alan Ruskin, chief international strategist at Deutsche Bank, said an upside surprise in the core rate of 0.4% or more would catch investors off guard, although geopolitical risk was likely to deter the bond market from trading too bearishly on stronger data.
”The more lasting impact to the data would likely come from a 0.4% m/m core number, which would mean that the two most important data releases for September numbers (non-farm payrolls and CPI) would both be making a case for the Fed remaining hawkish,” he said.
War Worries
Long-dated U.S. Treasury yields eased for a third straight session, also benefiting from some safe-haven demand from the escalation in the Israeli-Palestinian conflict following deadly attacks in Israel at the weekend.
Ten-year U.S. yields eased 3 basis points to 4.57% , off from a 16-year high of almost 4.9% late last week. European government bond yields barely budged with Germany’s Bund yield at 2.74%.
Oil prices were edging higher again though following two days of falls and after top OPEC producer Saudi Arabia had pledged to help stabilise the market amid fears the Israel-Palestinian war could cause supply disruption.
Brent futures were up 1% in London to $86.65 a barrel after a 2% drop in the prior session. U.S. West Texas Intermediate crude rose 0.7% to just about $84 following a 2.9% plunge on Wednesday.
Gold was 0.3% higher at $1,878.98 per ounce and at its highest in two weeks.
Christopher Granville, Managing Director, Global Political Research at TS Lombard said Middle East violence only tended to have a big impact on broader global markets when it dovetailed with existing oil supply worries as it did in the run up to the second Gulf War.
”If you apply that lesson to the present, I think you have to look at Iran,” Granville said, describing a ”plausible risk scenario” where Israel made a strike on Iran for backing Hamas.
”If there is to be an impact on the global markets, then that is the one.”
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