World shares head for biggest weekly fall of the year
London — World shares limped towards their biggest weekly fall of the year on Friday, though investors took heart from a dip in government bond yields as the incoming Bank of Japan chief ruled out an early end to its super-easy monetary policy.
There was focus too on the first anniversary of Russia’s invasion of Ukraine, or “special military operation” as Russia terms it, as calls for peace, but also warnings about a wider escalation, came from both Washington and Beijing.
European share markets opened higher, with the pan region Euro Stoxx 600 up 0.4% though overnight falls in Asia and lower Wall Street futures prices Wall Street meant MSCI’s main worldwide index was stuck in the red.
Europe’s moves were partly helped by a pause in this month’s sharp rise in global borrowing costs — a reversal of January’s trend.
During a lower house confirmation hearing, Kazuo Ueda, who will take over as governor of the Bank of Japan (BOJ) in April, said ultra-low interest rates were still needed to support Japan’s fragile economy, warning of the dangers of responding to cost-driven inflation with monetary tightening.
“Ueda is working hard to present himself as delivering continuity,” said Sean Callow, senior currency strategist at Westpac. “At least to start with.”
Japan’s Nikkei share index closed up 1.1%, while its five-year government bond yield eased to 0.235%.
Ten-year Japanese bonds didn’t trade on Friday due to thin liquidly, after breaching the upper limit of the BOJ’s policy cap for two straight days. But the yen turned choppy as data also showed core consumer inflation hitting a 41-year high, keeping pressure on the BOJ to phase out its stimulus programme.
Meantime, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8%, for a hefty weekly drop of 2.0%.
In particular, Chinese blue chips tumbled 1.0% and Hong Kong’s Hang Seng index dropped 1.3% on comments from US officials that it would increase the number of troops helping train Taiwan’s forces.
Wall Street was also pointing lower again having ended a topsy-turvy Thursday in positive territory for the first time in five sessions, albeit still on course for its worst week of the year.
Expectations US interest rates will rise meant the dollar index, which measures the top world currency against six of its main peers, was hovering at 104.71, just shy of a seven-week high of 104.78.
Investors were eyeing the release later of the US personal consumption expenditures (PCE) price index for January, the Federal Reserve’s preferred inflation measure. The index is expected to be up 0.4% from a month earlier, compared with 0.3% the previous month.
On Thursday, an unexpected fall in new claims for unemployment and a revised uptick in the fourth-quarter PCE price index, suggested strength in the world’s largest economy.
“The US dollar index should extend its rise towards 106 if today’s US PCE deflators lift the US Treasury 2Y yield above the 4.5-4.75% Fed Funds Rate range,” said analysts at DBS Bank.
Though most of the focus around the Ukraine war remained the loss of life and long-term geopolitical implications, it has also had a major impact on financial markets.
Aaron Dunn, co-head of value equity at Eaton Vance, said the most obvious impact when the war broke out had been the sharp increase in oil and gas and agricultural prices. Notably though, most of those moves have been largely reversed.
“You have basically retracted a fair amount of the gains in most of the energy markets in the back half of 2022,” Dunn said, highlighting that the slump in natural gas prices meant it was now replacing coal again in Europe.
“That has helped the global economic picture,” he explained. “The big question is now the top line, the economic performance, and in that respect China’s reopening will play an outside role in the direction we go from here.”
In the bond markets, the key Treasury yield, or the cost for the US government to borrow in the international debt markets, eased to as far as 3.8590%, compared with the previous close of 3.8810%.
Benchmark European yields edged down too after Germany, the bloc’s industrial powerhouse, said its economy shrank by slightly more than initially predicted in the fourth quarter of 2022.
Germany’s 10-year government bond yield fell 3 basis points to 2.44% after stronger-than-expected PMI data earlier in the week had pushed it to its highest level since August 2011.
In the oil market, Brent crude futures rose 0.8% to $82.84 while US West Texas Intermediate crude was also up 0.8% at $75.99.
Gold was fractionally higher at a spot price of $1,824.89 per ounce though it was on course for a fourth straight weekly drop.