LONDON/NEW YORK/SHANGHAI (Jan 13): Nervous global financial markets saw signs of stabilisation on Thursday, with major equity bourses and bond yields holding their ground and the dollar wilting after the highest US inflation reading in nearly 40 years.
The 7% year-on-year US consumer price inflation reading was the highest since 1982, but after weeks of Federal Reserve officials talking about faster interest rate hikes and stimulus withdrawal it had been widely expected.
Still, data released on Thursday that pointed to a rapidly tightening US labour market conditions presaged the supply bottlenecks and persistent inflation pressures to come, unsettling investors already nervous about imminent rate hikes.
Indeed, Fed Governor Lael Brainard said on Thursday that controlling inflation is the “most important task” for the central bank. “Inflation is too high, and working people around the country are concerned about how far their paychecks will go,” she said.
By late morning, MSCI’s gauge of stocks across the globe shed 0.14%, as stocks in Europe and the United States notched modest losses.
The S&P 500 lost 0.19%, the Nasdaq Composite dropped 0.73%, and the Dow Jones Industrial Average added 0.36%.
The pan-European STOXX 600 index lost 0.36%, as investors sold defensive and construction stocks on worries over a stubborn surge in Covid-19 cases and signs of tighter monetary policy.
Asian markets had weakened slightly overnight on softer-than-expected Chinese lending data and more falls in the property sector.
“As we see it, the inflation story is going to persist for a good while longer yet,” said Manulife Asset Management’s global macro strategist Eric Theoret.
“We have had a tremendous acceleration in the Fed’s tightening,” he added. Theoret pointed out that when the US central bank raised interest rates in 2015, it waited two years before shrinking its balance sheet, whereas this time it could begin by the end of the year.
“The challenge from here is how the global economy responds to this normalisation.”
In the bond markets, where borrowing costs have raced to keep up with rate hike expectations this year, 10-year US Treasury yields hovered around 1.7341% and Germany’s 10-year yield bobbed near -0.087% having approached positive yield territory for the first time since May 2019.
European Central Bank Vice President Luis de Guindos became the latest to warn that the current spike in inflation was not going to be as transitory as originally expected. Upmarket Swiss bathroom goods giant Geberit had seen its shares slide too, as it warned it was now impossible to predict how much raw materials prices would rise this year.
It is a busy period for bond issuance as countries and companies look to beat the rise in rates. Italy was due to sell up to 7 billion euros of three- and seven-year bonds later, and Ireland was eyeing a bumper sale. The week is also set to be a record one for emerging market corporate debt sales with nearly 30 taking place.
“It is a record in my time,” said Omotunde Lawal, head of emerging markets corporate debt at Barings. “Most people are swamped, but you can see why with as many as four Fed hikes now priced in.”
In the currency markets, the dollar continued to slip toward a two-month low against a basket of currencies, with the dollar index down 0.23% at 94.786.
The euro was a big beneficiary of the move and was steady at US$1.14600, up 0.17% on the day, while sterling and the yen also extended recent gains.
The pound is up more than 4% from December lows and traders have so far shrugged off a political crisis enveloping Prime Minister Boris Johnson, who apologised on Wednesday for attending a party at his official Downing Street residence in May 2020 during a coronavirus lockdown.
The central bank of New Zealand has begun hiking rates too, and the New Zealand dollar rallied 0.4% to US$0.6876, its strongest since late November.
Australia’s dollar, which tends to perform well when broader market sentiment is improving, added 0.15% to US$0.7295.
The Canadian dollar has rallied more than 3.5% in three weeks, gaining with oil prices as investors look past the potential economic fallout of the Omicron variant.
“The (US) dollar does not have to increase because the Fed is readying a tightening cycle,” said Commonwealth Bank of Australia strategist Joe Capurso.
“It is not a simple equation of Fed hikes equals dollar increases. The dollar is a counter-cyclical currency which decreases as the world economy recovers.”
In Asia, Chinese blue-chips dropped 1.6% after data showing mainland bank lending fell more than expected in December, causing property and consumption sectors to sink.
MSCI’s broadest index of Asia-Pacific shares outside Japan was flat after recording its biggest daily gain in a month on Wednesday. Japan’s Nikkei lost nearly 1%, after surging nearly 2% a day earlier.
Oil prices ticked lower in commodity markets too, a day after hitting their highest in nearly two months.
US crude fell 0.64% to US$82.11 per barrel and Brent was at US$84.21, down 0.54% on the day. A softer dollar did not bolster bullion prices, with spot gold down 0.64% at US$1,813.44 an ounce.
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