Global Markets: Shares take a breather after Fed rally, dollar slides on yen

The Federal Reserve surprised no one by lifting rates 75 basis points to 2.25%-2.50% on Wednesday, but did alter its statement to cite some softening in recent data.

Wall Street futures were down with U.S. GDP figures due shortly. U.S. President Joe Biden is scheduled to speak to Chinese counterpart Xi Jinping later on Thursday while tech giants Apple and Amazon are both set to report results.

World shares consolidated a six-week high on Thursday as investors scented a possible slowdown in the pace of U.S. rate hikes, a shift in tone that comforted bond markets but sent the dollar to a three-week low against the yen.

Europe gained as record-busting $11.5 billion profits from oil giant Shell sent commodity stocks soaring, although momentum faded on data showing euro zone consumer confidence slumping as inflation and the Ukraine war rage.

Eyebrows were raised too as China appeared to abandon mentions of specific growth targets for this year, stating instead that it would “strive to achieve the best possible results”.

Wall Street futures were down with U.S. GDP figures due shortly. U.S. President Joe Biden is scheduled to speak to Chinese counterpart Xi Jinping later on Thursday while tech giants Apple and Amazon are both set to report results.

The Federal Reserve surprised no one by lifting rates 75 basis points to 2.25%-2.50% on Wednesday, but did alter its statement to cite some softening in recent data.

Fed Chair Jerome Powell sounded suitably hawkish on curbing inflation in his news conference, but also dropped guidance on the size of the next rate rise and noted that “at some point” it would be appropriate to slow down.

“There was a pretty convincing risk-on reaction from the market to the Fed, but whether that can continue remains to be seen,” said Abrdn investment director James Athey.

The reality was, he added, that if the U.S. central bank does slow its rate hikes it would only be because the economy was struggling, which would not be a good sign.

“The bias is we don’t see much more on the upside (in share markets) given that there is a recessionary outlook,” Athey said. “Everybody is somewhere on the spectrum.”

The futures market still has 100 bps of further tightening priced in by year-end, but also implies around 50 bps of rate cuts over 2023.

Just the hint of a less aggressive Fed left MSCI’s 47-country index of world shares up 0.3% and firmly on course for its first back-to-back run of weekly gains since March.

Despite Europe now facing a gas crisis and increasingly likely a recession, according to economists, the STOXX 600 rose as much as 0.5%. The FTSE and DAX both slipped in and out of the red but Italy’s FTSE MIB marched 1% higher.

In Asia, Japan’s Nikkei had added 0.4% despite a jump in the yen which can often weigh on Tokyo. South Korea climbed 0.8% too although Chinese blue chips closed little changed, having been brightened earlier by reports Beijing was planning more support for China’s crisis-hit property sector.

APPLE EYED

Wall Street looked set to take a post-Fed breather, with S&P 500 futures 0.2% lower and Nasdaq futures down 0.5%, after the tech-heavy index had enjoyed its biggest daily gain since April 2020 on Wednesday.

Shares of several major U.S. tech companies, including Meta Platforms, were down over 5% in pre-market trading as poor quarterly results and outlooks underscored recession fears.

Apple and Amazon, which will both report after trading finishes, have seen a torrid run for their shares this year. Chip maker Qualcomm was already out warning of difficult economic conditions and a slowdown in smartphone demand.

Attention will also be focused on U.S. gross domestic product data for the second quarter, due at 1230 GMT. Another negative reading would represent what many consider a “technical” recession, though the United States has its own method of deciding those.

Median forecasts are for growth of 0.5%, but the closely watched Atlanta Fed estimate of GDP is for a fall of 1.2%.

In bond markets, two-year Treasury yields dipped under 3% after falling in the wake of the Fed meeting.

Although the U.S. yield curve steepened slightly, most of it remained inverted in a sign investors believe policy tightening will lead to an economic downturn and lower inflation.

Europe’s benchmark 10-year German Bund yield also began slipping again, having been on the cusp of 1% in early dealing.

“While central banks are still on track to continue tightening this year, it is increasingly likely that the most rapid pace of rate hikes may be behind us,” analysts at JPMorgan said in a note.

Others are not so sure. Flavio Carpenzano, investment director at Capital Group, which manages $2.6 trillion worth of assets, said 9% inflation in the United States would remain the main concern for the Fed.

“Combining this with a labour market that remains very tight, it’s difficult to envisage the Fed can slow or justify a slower hiking pace.”

In currencies, the dollar index eased a fraction to 106.260 after losing 0.7% overnight as risk sentiment improved.

It also suffered a rare setback against the Japanese yen, falling 0.7% to 135.56 as some investors decided to book profits on a host of long positions.

The euro hovered around $1.0204, having bounced 0.9% overnight, but faces stiff resistance at $1.0278.

The single currency still has an energy crisis to contend with as the IMF warned that a complete cut-off of Russian gas to Europe by year-end may lead to virtually zero economic growth next year.

Russia has delivered less gas to Europe this week and warned of further cuts to come, boosting prices for gas and oil globally. A drop in crude inventories and a rebound in gasoline demand in the United States also supported prices.

Brent rose another $1.40 to $108 a barrel, having bounced 2% overnight, while U.S. crude gained $1.50 to $98.73.

Spot gold was 0.6% firmer at $1,744 an ounce, having benefited from the dip in the dollar and bond yields.

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