By Marc Jones
LONDON (Reuters) – World stock markets rose on Thursday as shares on Wall Street rallied, and Treasury yields fell, after investors took comfort that the Federal Reserve might pause its interest rate rises to offset the turmoil in financial markets.
The gains in U.S stocks offset loses in Europe, where a post-Credit Suisse rebound sputtered to a halt as Switzerland, Norway and Britain all showed the year-long cycle of sharp interest rate rises was by no means over.
While markets were relieved when the Fed hinted at a pause after its latest quarter-point rise on Wednesday, even as it re-stated its commitment to fight inflation, the sight of Switzerland’s SNB jacking up rates despite its torrid week and the Bank of England hoisting borrowing costs after a nasty inflation surprise were reminders not to get carried away.
By late morning, the Dow Jones Industrial Average was up 0.81%, the S&P 500 climbed 1.10%, and the Nasdaq Composite Index jumped 1.72%. The gains helped MSCI’s main world share index jump 1%.
Stephen Innes, a managing partner at SPI Asset Management, said investors are betting that despite the Fed’s vows to tame inflation, there is a chance “the Fed loses its nerve and downshifts anyway.”
“Note the modern-day history book of Fed pauses is very bullish for stocks,” Innes said.
In Europe, news of two rate hikes in Switzerland and Britain kept the European-wide STOXX 600 share index down 0.42%. The banking sector was again a drag, with the index of top European banks down 2.1%.
Investor bets of a more dovish Fed put the dollar on the back foot, with the dollar index down 0.17% after hitting a seven-week low earlier in the session. The pound barely budged, having already added to its near 5% rally over the last fortnight with a 0.3% morning rise to $1.2315.
John Leiper, Titan Asset Management’s chief investment officer, said the BoE’s hike came as no surprise following Wednesday’s painful inflation data.
“We think there is more to come,” he added, although he cautioned the result could be a recession.
Fed chief Jerome Powell had said that, while inflation remained a problem, the current stresses in the banking sector could have a significant impact on the U.S. economy, thereby reducing the need for rate rises.
Germany’s hawkish European Central Bank rate setter, Joachim Nagel, had even said he now thought euro zone rates were “approaching restrictive territory”, referring to a level that curtails growth.
“I do not know when we will more or less be there,” he had said at an evening event in London on Wednesday. “But what I know is that when we are there we have to stay there and not come down too early.”
Both the euro and yen remained up on the day after the SNB’s half-point hike. [FRX/]
(Graphic: Global markets in 2023 – https://fingfx.thomsonreuters.com/gfx/mkt/movakwyrqva/Pasted%20image%201679575321648.png)
BRIGHT FUTURES
U.S. stocks sold off on Wednesday after U.S. Treasury Secretary Janet Yellen told lawmakers that she had not considered or discussed creating “blanket insurance” for U.S. banking deposits without approval from Congress.
Markets are now pricing in an approximately 65% chance of the Fed pausing at its next meeting, in May, and a 35% chance of a 25-bps-rise.
For bond markets it meant European government bond yields – which reflect borrowing costs – were heading down again. German Bunds were back at 2.25%, having seen 10-year U.S. Treasury yields dip back below 3.5%.
Among commodities Brent oil, which has fallen nearly 9% this month, was steady at $76.80 a barrel. Gold, which is up more than 8% for March, was fractionally higher on the day at $1,982.84 an ounce. [GOL/]
“The thought of peak U.S. rates being within reach is bolstering (gold) prices,” said Han Tan, chief market analyst at Exinity.
“As long as market expectations for a 2023 rate cut remain intact, gold may well revisit the psychologically-important $2,000 mark.”
(Reporting by Marc Jones; Editing by Mark Heinrich, Alex Richardson and Jonathan Oatis)
