Global stocks pause as investors ponder further rate hikes

London — World stocks paused near five-month highs on Wednesday as signs that central banks might need to keep hiking interest rates for longer damped a recent wave of optimism that aggressive monetary tightening is almost done.

Australia’s dollar strengthened more than 0.7% to its highest in over five months after data showing inflation accelerated to a 33-year high of 7.8% last quarter, bolstering the case for another interest-rate hike from the Reserve Bank of Australia (RBA) next month.

Canada’s central bank is widely expected to lift interest rates again later on Wednesday, with recent strong data supporting expectations for another move.

Trade in European stocks was lacklustre and the broad Euro Stoxx 600 slipped 0.3%. US stock futures pointed to a soft open for Wall Street .

Globally, equities have posted strong gains this year after a rout in 2022, on expectations that inflation has peaked and that US interest rate rises will taper. The dismantling of Covid-19 controls in China and the reopening of its borders have further boosted investor sentiment.

MSCI’s world equity index, which is up more than 6% this month, was broadly steady near five-month highs on Wednesday.

“Our view is that the move in risk assets is overdone,” said Guy Miller, chief market strategist at Zurich Insurance Group. “Broadly speaking, the problem that we have is that economic conditions are getting worse and the data we are looking at points in that direction.”

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan hit a seven-month high, though trading volume was depressed as markets in China and Taiwan were still closed for the Lunar New Year holidays.

Shares in Microsoft gave up most of their 4% gains posted in after-hours trade. The tech titan’s better-than-expected results showed some strength in the face of a weak economy but weak revenue growth signalled tougher times for the sector.

Microsoft on Wednesday said it was investigating a networking issue that affected multiple services.

Aussie dollar surge

In currency markets, the Australian dollar strengthened to $0.7123 after the latest inflation data. The unit has risen almost 2% this week and is poised for its biggest weekly jump in more than two months.

Investors sharply narrowed the odds on the RBA lifting its cash rate by a quarter point to 3.35% when it meets on February 7. Previously, some analysts had thought there was a chance the bank might pause its tightening campaign.

“The RBA is hiking the cash rate by 25 basis points a meeting, and we do not believe this will change,” ING analysts said in a note.

The euro was flat at around $1.0887 and holding below recent nine-month peaks. Data showing German business morale brightened in January didn’t appear to be reason enough to push the single currency higher for now.

Germany’s ifo Institute said its business climate index rose to 90.2, in line with consensus according to a Reuters poll of analysts and up from 88.6 in December.

The New Zealand dollar fell after the country reported annual inflation of 7.2% in the fourth quarter, below a central bank forecast of 7.5%.

Gold prices dipped 0.5% to $1,928 an ounce, off a nine-month peak touched in the previous session.

Reuters