Global stock markets rally, dollar drops as US inflation fear eases

Global stocks rose and the dollar retreated on Tuesday as a fall in US inflation and an improving outlook for China’s economy continued to cheer investors.

Equities and bonds jumped last week after data showed that U.S. consumer inflation slowed down by more than expected in October, raising hopes the Federal Reserve will let up on the interest rate hikes which have battered economies and markets this year.

The mood remained bright on Tuesday, with the MSCI All World stock index rising 0.61% to 618.52. It has jumped more than 6% since the inflation data was published on Thursday.

An earlier decline in the dollar and a rise in stocks accelerated after fresh data showed that US producer prices increased less than anticipated in October, further bolstering the argument for smaller interest rate hikes.

US stock market futures soared, with S&P 500 futures up 1.75%. Europe’s continent-wide Stoxx 600, which had been trading flat, rose 0.39%.

The dollar was last down 1.33% against Japan’s yen to 138.09, a three-month low. Meanwhile, the euro jumped 1.19% against the greenback to a more than four-month high of $1.044.

“Markets are driven by two factors at the moment. One is optimism that inflation data in the U.S. is peaking out ... and on top of that we’ve had growing optimism that we could see China adopt more growth-friendly policies,” said Lee Hardman, currency analyst at MUFG. However, Chris Turner, global head of markets at ING, said the dollar is likely to strengthen again as concerns about the global economy return to the fore.

“We’re more in the camp that it hangs around near the highs a bit longer,” he said. “We haven’t got world growth.”

Chinese and Hong Kong stocks rallied overnight as investors digested China’s COVID-19 policy adjustments, a property sector rescue package, and a cooling in tensions between the US and China. Beijing last week eased some of its strict COVID rules, though there has been a sharp increase in new infections in some cities this week.

Hong Kong’s Hang Seng Index surged 4.11% overnight. The index is up nearly 25% for the month while China’s CSI 300 has gained 10% in that time.

U.S. President Joe Biden and China’s President Xi Jinping held a three-hour meeting on Monday in Bali on the sidelines of the G20 gathering. Investors welcomed the two countries’ pledge of more frequent communications.

“There was positive mood music out of the G20 with Biden and Xi’s meeting,” said ING’s Turner.

The yield on the benchmark 10-year U.S. Treasury note dropped 8 basis points on Tuesday to 3.783%, its lowest since early October. The yield, which moves inversely to the price, stood as high as 4.338% at the end of October but has plunged in recent days.

Fed Vice Chair Lael Brainard on Monday struck a relatively upbeat tone, saying rates would rise further but it will “probably be appropriate to soon move to a slower pace” of increases.

Data out on Tuesday showed that the British unemployment rate rose in September. German business sentiment saw a stronger-than-expected rise in the closely watched ZEW survey.

Oil prices were little changed, with Brent crude down 0.55% to $92.65 a barrel.

Bitcoin was up 2.4% to $16,997 but remained around 20% lower for the month. The collapsed FTX crypto exchange outlined a “severe liquidity crisis” in official bankruptcy filings released on Tuesday.

The Group of 20 (G20) meetings continued in Indonesia, with leaders preparing a draft resolution on Tuesday in which most members condemn the war in Ukraine.

Oil prices fell by over $1 a barrel on Tuesday as rising COVID-19 cases in China heightened fears of lower fuel consumption from the world’s top crude importer.

Brent crude futures were down $1.08, or 1.16%, to $92.06 a barrel at 1435 GMT, while US West Texas Intermediate crude fell $1.13, or 1.32%, to $84.74. Investors cheered China’s announcements last week that it would reduce the impact of a strict zero-COVID policy to spur economic activity and energy demand, but analysts said lockdowns and surging case numbers continue to be a key downside risk.

“Rising COVID cases in Beijing and in other cities served us with a reminder that a change in the trajectory of economic and oil demand growth in the world’s biggest oil importer is anything but imminent,” said Tamas Varga of oil broker PVM.

The country’s COVID cases rose further on Tuesday, including in the capital Beijing, and the country’s factory output growth slowed. Investment bank JPMorgan on Tuesday cut its quarterly and full-year forecasts for economic growth in China because of the ongoing COVID restrictions.

Meanwhile, the Organization of the Petroleum Exporting Countries (Opec) cut its 2022 global oil demand growth forecast for a fifth time since April, citing mounting economic challenges including high inflation and rising interest rates.

Both benchmarks saw some support throughout the session from supply concerns.

A European Union ban on seaborne Russian crude, set to start on Dec. 5, means that 1.1 million barrels per day (bpd) will need to be replaced, the International Energy Agency said on Tuesday.

Agencies