Global shares at 14-month highs as concern over rate hikes eases

Global shares rose to 14-month highs on Friday as investors took the view that the Federal Reserve may not need to raise rates much more, while the dollar headed for its biggest weekly slide since January.

The MSCI All-World index was up 0.2 per cent, around its highest since mid-April 2022.

This has been an intense week of central bank decisions, with the Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) on the docket.

All three stuck to the script, delivering exactly what the market had priced in - in the case of the Fed and the BOJ, no change in rates, and the ECB, a quarter-point rise.

The Fed’s widely anticipated “skip” will likely be followed by a rate rise in July and, according to Chair Jerome Powell, possibly one more hike this year. ECB President Christine Lagarde said inflation was too high for comfort and she and her colleagues had more work to do to bring it down. However, money markets show traders believe the Fed might have just one more rate hike to go before it is done, while the ECB could raise at least once, if not twice, before year-end.

With non-US rates now starting to catch up with the Fed funds rate, the dollar is heading for a 1.3 per cent drop this week, its largest since mid-January.

Weekly jobless data showed the number of people claiming unemployment benefit for the first time rose in the latest week and this overshadowed a modest beat in retail sales figures.

“Ironically, the rest of the US data from yesterday had been perfectly respectable,” Deutsche Bank strategist Jim Reid said.

“But markets are overweighting the weekly claims data at the moment, since they’re one of the most timely indicators we get, and would therefore be one of the first to show if the labour market is beginning to crack,” he said.

US stock index futures were flat on the day, indicating the benchmark indices could open near Thursday’s 14-month highs later on.

“If US labour markets are finally starting to soften, this lends some credibility to the Fed’s decision to pause,” said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

The two-year US Treasury yield, the most sensitive to changes in interest rate expectations, was last up 4 basis points at 4.684 per cent, while gold, which tends to profit from dollar weakness, rose 0.4 per cent to $1,965 an ounce.

In the currency markets, the yen fell by as much as 0.8 per cent against the dollar after the BOJ maintained its -0.1 per cent short-term interest rate target and a 0 per cent cap on the 10-year bond yield set under its yield curve control (YCC) policy, as markets expected.

The dollar was last up 0.45 per cent against the yen at 140.91 yen, below Thursday’s seven-month low of 141.50. The Nikkei, which hit 33-year highs this week, closed up 0.7 per cent, for a 10th straight week of gains.

Nikko Asset Management chief global strategist John Vail said the changing expectations of when the BOJ would tweak YCC will affect the yen.

“Anyone who shorts the yen should know that if it gets much weaker, the Japanese government will likely intervene quickly and with little warning.”

The euro was flat against the dollar at $1.0947, hovering just shy of Thursday’s one-month high following the ECB rate decision and press conference.

“(ECB President) Lagarde insisted that there was more ground to cover, but the overall tone of the press conference suggested that there might not be a whole lot more to do, despite the upgrade to the inflation forecast,” strategists from NatWest Markets said in a note.

Oil prices eased, retreating after a 3 per cent gain the day before on the back of optimism over higher energy demand from top crude importer China.

Reuters