SYDNEY – Asian shares extended gains on Friday as hopes of more Chinese stimulus and speculation of a British government U-turn on its fiscal plans supported risk sentiment, while the safe-haven dollar eased.
But long-term gains would be overshadowed by lofty inflation, with the latest U.S. consumer inflation report reinforcing bets that interest rates would stay higher for longer, hastening the risk of a global recession.
Asian shares tracked overnight gains on Wall Street and the optimism looked set to continue in Europe. The pan-region Euro Stoxx 50 futures rose 1.8 percent. Both the U.S. S&P 500 futures and the Nasdaq futures reversed earlier losses to be up 0.6 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan advanced 2.6 percent on Friday. Japan’s percent. Nikkei jumped 3.4 percent, enjoying the best day since March.
Chinese bluechips also rose 2 percent, marking the biggest gain since August, after the country’s central bank governor promised stronger support to the real economy as COVID lockdowns spread ahead of the all-important Communist Party Congress.
The much anticipated U.S. data overnight showed core inflation – which excludes food and fuel prices – came in above forecasts at 6.6 percent, the biggest annual increase in 40 years, driven by large price gains in the services sector.
U.S. stocks, however, surged to close more than 2 percent higher on Thursday, as technical support and investors covering short bets drove a dramatic rebound from a selloff earlier in the day.
“The reversal in equities, that could have come about because there’s perhaps a bottom-line moment when markets thought hang on, it’s the same difference, nothing changes,” said Vishnu Varathan, chief economist at Mizuho Bank in Singapore.
“So long as we don’t shift to a point where it becomes a 100 basis point hike call. As long as it remains at 75, then OK… I think that’s also why the dollar was put back from a position of strength because safe-haven demand for the dollar got overtaken by the risk-on drift out of long dollar positions.”
Headlines that the British finance ministry Kwasi Kwarteng was cutting short a trip to Washington to return to London and work on the fiscal plan also helped sentiment, according to Varathan.
British government bonds have outperformed lately, with prices rising strongly on Thursday after reports that the government was considering a U-turn on some of the measures in its late-September “mini-budget” that triggered a historic gilts slump and concerns about financial stability.
Sterling, which surged 2 percent on Thursday on reports of the UK U-turn, held steady around its one-week high at $1.13.
Investors are also nervously awaiting an impending deadline for the end of the Bank of England’s emergency bond-buying program on Friday.
“Despite the rally today, we have to recognize that we are in contractionary period of the economic cycle,” said David Chao, global market strategist, Asia Pacific, at Invesco.
“I expect inflation to come down significantly on a year over year basis by the middle of next year. Typically, that creates a nice backdrop for equities and credit but there will be likely be more downside between now and then.”
Following the strong U.S. inflation report, the markets have now fully priced in a 75 basis point hike from the Fed at its November meeting and a 71.5 percent probability for another jumbo rate hike in December.
Futures have also suggested that rates would now peak at 5 percent, bringing them to levels not seen since 2007.
The aggressive tightening from the Fed is putting pressure on central banks around the globe to follow. Singapore’s central bank on Friday tightened monetary policy for the fourth time this year and warned more would be needed to tame inflation.
Global markets have been extremely volatile recently as investors worry rising interest rates could push major economies into recession before taming inflation, while there are concerns a strong dollar, buoyed by aggressive Fed tightening, could wreak havoc in emerging markets.
The dollar index retreated 0.2 percent to 112.34 on Friday, following a drop of 0.6 percent in the previous session.
The Japanese yen, on the other hand, touched a 32-year low of 147.67 per dollar overnight before stabilising around 147.4 on Friday. That is below the 145.9 level which prompted Japanese authorities to intervene last month to prop up the yen.
Oil prices fell. Brent crude futures were down 0.2 percent at $94.37 a barrel while U.S. West Texas Intermediate (WTI) crude futures fell by similar margin to $88.95 per barrel.
Gold was slightly higher at $1,667.48 per ounce.