Global stocks firm as markets look beyond Fed’s likely rate hike

London — World equity markets rallied on Wednesday and the dollar eased as investors appeared to look beyond another likely rise in US interest rates and hoping for a slowdown in the pace of aggressive monetary tightening.

The Federal Reserve concludes a two-day meeting later in the day and is widely expected to deliver a fourth, 75 basis-point rate hike to contain stubbornly high inflation.

The key question for markets is whether the Fed will also signal it could slow further rate hikes, in a so-called dovish pivot.

“The extreme sensitivity of global assets and the dollar to the theme of a dovish pivot has boosted the notion this will be a make-or-break event for market sentiment,” said ING currency strategist Francesco Pesole.

European stock markets opened mostly firmer, Asian shares outside Japan rallied to a two-week high and US equity futures pointed to a firm open for Wall Street.

With a 75 bps increase in the Fed’s key rate on Wednesday to a range of 3.75%-to 4% priced in, traders are split on the size of a December move while futures market are pricing in a roughly a 40% chance of another 75 bps increase.

Data on Tuesday showing a jump in US monthly job openings supported the case for the Fed to remain in the hawkish camp.

Analysts said that uncertainty about economic data means a more accommodating stance could still be some way off, leaving risk assets such as stocks vulnerable and the dollar supported.

“We suspect [Fed] chair [Jerome] Powell will try very hard to avoid saying anything that might be misconstrued as a signal that the inevitable step down in the size of tightening is a pivot towards the end of the tightening cycle,” said Kevin Cummins, chief US economist at NatWest Markets.

“Given that the inflation-related data have yet to show any signs of moderation, we lean a bit more towards officials holding off from signalling they are reducing the size of hikes just yet.”

Cummins expects the Fed to step down to a 50 bps hike in December.

China hopes

Upbeat remarks by Chinese regulators about policy support and rising expectations among investors about an easing of strict Covid-19 measures boosted sentiment in Asia. Chinese blue chips and Hong Kong stocks gained 1.2% and 2.4%, respectively.

Japan’s Nikkei stock index closed flat, holding close its highest levels since September.

In currency markets, the dollar eased 0.25% against a basket of major currencies. It weakened 0.75% against yen to ¥147.16/$ amid fears of intervention from authorities and thin liquidity.

Bank of Japan Governor Haruhiko Kuroda said on Wednesday a tweak to the central bank’s yield-curve control policy, which has contributed to the weakness in the yen, could become an option.

The robust dollar has pulled back in October on speculation the Fed might indicate a slowdown in its aggressive tightening campaign, but a Reuters survey found currency strategists believe the dollar’s retreat is temporary.

US Treasury yields were largely steady after reversing much of Tuesday’s sharp rise on the unexpected strength in the jobs data.

Ten-year Treasury yields hovered around 4.04% while two-year yields eased 3 bps to 4.51%.

Oil climbed after industry data showed a surprise drop in US crude stockpiles, suggesting demand is holding up. Brent crude futures were 0.25% firmer at $94.90 a barrel, and US crude oil futures rose 0.5% to $89.76 a barrel.

Gold was slightly higher, with spot price at $1,652 an ounce.

Reuters