GLOBAL MARKETS-Shares cautious, U.S. yield curve deep in recession territory

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Asian stock exchanges: https://tmsnrt.rs/2zpUAr4

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Markets jittery after Fed rate warning

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US yield curve most inverted since 1981

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Dollar encounters fresh selling, but off weekly lows

By Wayne Cole

SYDNEY, Nov 18 (Reuters) – Asian shares were in a cautious mood on Friday after U.S. Federal Reserve officials fired more warning shots on interest rates, while rising coronavirus cases in China and liquidity tensions in its bond market added to uncertainties.

Both the dollar and bond yields rose overnight when President St. Louis Fed’s James Bullard said interest rates may need to reach a range of 5% to 7% to be “tight enough” to contain inflation.

That was a blow to investors who had bet that rates would peak at 5% and saw Fed funds futures sell off as markets were more likely to see rates now reach 5-5.25%, rather than 4.75- 5.0%.

Two-year yields climbed back up to 4.46%, paring last week’s sharp inflation-driven 33 basis point drop to a low of 4.29%. That left them 69 basis points above 10-year yields, the biggest inversion since 1981.

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“The message is about the Fed’s willingness to lean on what they would consider a premature easing of financial conditions,” said Brian Daingerfield, an analyst at NatWest Markets. “And on that front, the message was received.

“The Fed seems completely focused on over-signalling on the tightening front and hoping the data slows down to the point where they can have the flexibility to undercut.”

Bond market warnings of a recession weren’t exactly what Wall Street wanted to hear and left S&P 500 futures unchanged, while Nasdaq futures rose 0.1%.

EUROSTOXX 50 futures added 0.7% and FTSE futures added 0.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan rebounded 0.5%, after falling for two sessions.

China’s blue chips were unchanged on reports that Beijing asked banks to check liquidity in the bond market after high yields caused losses for some investors.

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There were also concerns that a surge in COVID-19 cases in China could throw into question plans to ease strict restrictions on movement that have stifled the economy.

THE COLOR IS NOT FOR TURNING

Japan’s Nikkei rose 0.1% as data showed inflation was at a 40-year high as a weak yen pushed up import costs.

Still, the Bank of Japan argues that inflation is largely driven by energy costs beyond its control and that the economy needs continued super-easy policy.

The situation was radically different in Britain, where Chancellor of the Exchequer Jeremy Hunt had just announced tax increases and spending cuts in an effort to reassure markets that the government was serious about tackling inflation.

Dire predictions that the economy is already in recession saw the pound at $1.1916, below the weekly record of $1.2026.

After a jump overnight, the dollar itself encountered renewed selling and eased to 106.460 on a basket of currencies, back towards the three-month low of 105.30 touched earlier in the week. The dollar also fell to 139.78 yen, but held above a recent low of 137.67.

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The euro held steady at $1.0376, down from a four-month high of $1.0481 hit on Tuesday, as some policymakers urged caution on tightening.

ECB President Christine Lagarde will deliver an opening speech later on Friday that could offer guidance on how the bank’s majority can lean.

In commodity markets, a jump in the dollar and yields left gold at $1,762 an ounce, off a peak of $1,786 earlier in the week.

Oil futures rebounded somewhat on Friday, but continued to post heavy losses for the week amid concerns over Chinese demand and rising US interest rates. Brent added 79 cents to $90.57, down 5.5% on the week, while U.S. crude rose 92 cents to $82.56 a barrel.

(Reporting by Wayne Cole; Editing by Bradley Perrett and Sam Holmes)

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