LONDON/SYDNEY, Nov 18 (Reuters) – Global stocks were heading for a 1% loss for the week on Friday, drifting off recent two-month highs after U.S. Federal Reserve officials fired fresh warning shots at interest rates, while US bond yields price curve for a recession.
The dollar and bond yields rose after St. Louis Fed President James Bullard said interest rates may need to reach a range of 5-5.25% from the current level of just under 4.00% to be “sufficiently restrictive” to curb inflation.
It was a blow to investors who had bet rates would peak at 5% and saw fed funds futures sell off as markets priced higher odds of rates now hitting 5-5.25 %, rather than 4.75-5.0%.
“The Fed came back through their rhetoric and pushed back the market narrative – we’re not going to see a pivot,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management.
Sai said the market is currently operating on steam and he will focus on the real economy’s response to higher rates, such as anecdotal signs of a slowdown in the US labor market.
The MSCI global stock index (.MIWD00000PUS) edged up 0.17% while US S&P futures were flat after the S&P 500 index (.SPX) fell 0.3% on Thursday.
European stocks (.STOXX) gained 0.54%, with banks (.SX7P) rising nearly 1% as the European Central Bank prepares to launch the biggest cash withdrawal from the eurozone banking system of its history.
Banks are expected to repay around 500 billion euros in loans to targeted long-term refinancing operations (TLTROs). The ECB announcement is expected at 11:05 GMT.
Britain’s FTSE (.FTSE) gained 0.33%, a day after Finance Minister Jeremy Hunt announced tax hikes and spending cuts in a bid to reassure markets that the government was seriously in the fight against inflation.
British retail sales recorded only a partial rebound last month after shops closed in September for Queen Elizabeth’s funeral, data showed on Friday, and remained below their pre-level. the pandemic, with soaring inflation having hit purchasing power.
“Although the Bank of England will likely continue to raise rates despite a slowing economy, their peak will likely be lower than in the United States,” said Dean Turner, eurozone chief and UK economist at UBS Global Wealth Management.
US two-year yields rallied to 4.48%, somewhat retracing last week’s steep 33 basis point inflation-driven decline to a low of 4.29%.
That left them 69 basis points above 10-year yields, the biggest reversal since 1981 and an indicator of impending recession.
The dollar was flat at 106.65 on a basket of currencies, after hitting a three-month low at 105.30 earlier this week.
The US currency remained stable at 140.23 yen, but held above its recent low of 137.67. The pound rose 0.3% to $1.1904.
The euro held steady at $1.0357, after hitting a four-month high of $1.0481 hit on Tuesday as some policymakers urged caution on tightening.
ECB President Christine Lagarde will deliver a keynote speech later Friday that could offer some hints about where the majority of the bank might go.
MSCI’s broadest Asia-Pacific ex-Japan equity index (.MIAPJ0000PUS) was flat.
Chinese blue chips (.CSI300) fell 0.45% amid reports that Beijing had asked banks to check bond market liquidity after soaring yields caused losses for some investors.
There were also fears that a rise in COVID-19 cases in China could jeopardize plans to ease tough movement restrictions that have strangled the economy.
The Japanese Nikkei (.N225) fell 0.1% as data showed inflation hit a 40-year high as a weak yen fueled import costs.
Yet the Bank of Japan argues that inflation is mainly due to energy costs beyond its control and that the economy needs continued ultra-easy policies.
Brent crude hit four-week lows on concerns over weakening demand in China and further interest rate hikes by the Fed.
Brent crude hit a low of $89.51 a barrel, down 0.2%. US crude was flat at $81.67 a barrel.
Gold gained 0.1% to $1,763 an ounce after hitting a three-month high of $1,786 earlier in the week.
Editing by Bradley Perrett, Sam Holmes and Simon Cameron-Moore
Our standards: The Thomson Reuters Trust Principles.
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