Stocks and bonds extend precarious rally on hopes rate hikes ease

• European and Asian stocks up 1% as optimism for 2023 continues
• Oil Slides on Lingerie Demand Concerns
• Dollar falls as euro is supported by inflation data

LONDON, Jan 4 (Reuters) – Stocks rose and bonds rallied around the world on Wednesday as investors entered the new year with tentative optimism after a brutal 2022, looking to cheer inflation data around the world. hope that rate hikes may be less aggressive than expected.

The pan-European STOXX 600 (.STOXX) It was up 1.15% at 11:30 GMT as lower inflation in France boosted sentiment, building on positive data from Germany earlier in the week.

Eurozone government bonds have also extended their rally since the first two trading days of 2023, with Germany’s benchmark 10-year yield slipping 10 basis points on signs that central banks are making progress against inflation. .

The yield on 10-year Treasury bills fell to 3.6809%, and 2-year Treasury yields, which generally move in line with interest rate expectations, slipped 6 basis points to 4 .3409%.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) was 1.69% higher and set for a third straight day of gains for the year, having fallen 20% in 2022, its worst performance since 2008.

The modest rally in stocks and bonds showed optimism about two of the factors that made 2022 such a hellish year for investors, namely the constant drumbeat of rate hikes to fight inflation and the anti-COVID measures strangling the Chinese economy.

But jitters in other assets showed the way forward will be far from smooth as policymakers try to balance encouraging economic growth while keeping inflation in check.

Oil prices fell sharply as concerns over global demand persisted amid signs of weakening activity in key growth drivers such as the United States, Europe and China.

“Further warnings about the effect of aggressive rate hikes on the US economy are rocking traders again, with the price of oil continuing to fall,” said Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown.

U.S. crude fell 2.5% to $75.03 a barrel, while Brent was at $80.09, down 2.42% on the day.

fed up

Positive equity market growth on Wednesday was a prelude to a key data release that could reverse the momentum.

Minutes of the US Federal Reserve’s December meeting, where it warned that rates may have to stay higher for longer, are due out at 19:00 GMT. Investors will analyze the minutes to determine whether further policy tightening is likely, as well as analyze US job vacancies data at 15:00 GMT.

“The market has had a pretty hesitant start to the year…(and) is still grappling with the notion of what we’re going to see from the Fed this year,” said Rob Carnell, head of Asia-Research. ING Pacific.

“There are two sides there and they are fighting for dominance in terms of sight. Some days win higher for longer, some days (the) side higher than the lower wins,” Carnell said.

US stocks, which started the year more tentatively amid sharp falls in key stocks such as Tesla, looked set to open with modest gains. E-mini futures for the S&P 500 rose 0.44%.

The US central bank said last month when it raised interest rates by 50 basis points that terminal rates may need to stay higher for longer to fight inflation.

Markets are pricing in rate cuts for the end of 2023, however, with fed funds futures implying a range of 4.25% to 4.5% by December.

Hopes of less aggressive rate hikes boosted non-performing gold, with spot prices of the precious metal hitting $1,858 an ounce at 11:48 GMT, their highest level since mid-June.

The dollar index, which measures the greenback against six other currencies, meanwhile fell 0.6% as commodity currencies such as the Australian dollar gained and the euro rose on the data. positive French and German inflation.

The pound last traded at $1.2055, up 0.74%, while the euro rose 0.6% to $1.0610, coming off a three-week low. at $1.0519 touched overnight.

The Japanese yen strengthened 0.12% against the greenback to 130.85 to the dollar.

Reporting by Lawrence White and Ankur Banerjee; Editing by Sam Holmes, Jan Harvey and Chizu Nomiyama

Our standards: The Thomson Reuters Trust Principles.