World stocks at 5-week high, earnings in the spotlight

LONDON  – World stocks scaled a five-week high on Wednesday, lifted by growing hopes that the pace of U.S. interest rate hikes could soon start to slow.

Wall Street stocks futures fell, pointing to a weak open later on, after Google-owner Alphabet posted softer-than-expected ad sales after Tuesday’s close and Microsoft missed expected revenue forecasts.

But European shares headed higher, having opened softer, drawing some comfort from upbeat bank earnings. Deutsche Bank posted a better-than-expected jump in third quarter profit, while British bank Barclays too beat profit forecasts on a trading boom.

MSCI’s World Stock Index touched a five-week high, while Asian shares rallied.

Although the U.S. Federal Reserve is widely expected to deliver another 75 basis point rate hike at its November meeting, a view that the central bank could then start to slow its aggressive tightening cycle has lifted sentiment in world share markets and taken the edge off a dollar rally.

“The MSCI world equity index is now nearly 10 percent off its lows – a move that has been helped by some stability in Europe and probably the very high cash and underweight equity positions held by the investor community,” said Chris Turner, global head of markets at ING.

“It does feel like it is too early to declare the ‘all-clear’ for equity markets – for example the Fed could well push U.S. real rates deeper into restrictive territory – meaning that we are treating this dollar decline as corrective.”

The euro pushed back above $1 for the first time in five weeks, while the dollar index – which measures the dollar’s value against a basket of other major currencies — fell to a three-week low.

The Bank of Canada is widely expected to raise rates by another 75 bps later in the day to contain stubbornly high inflation.

Fed pivot?

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rallied over 1 percent, while Japan’s Nikkei rose 0.7 percent having hit its highest level since Sept. 20.

Chinese shares recovered some ground after a sharp selloff on Monday sparked by concerns that President Xi Jinping’s new leadership team, revealed on Sunday, will prioritise the state at the cost of the private sector, and keep tough zero-COVID policies in place possibly into next year.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, said the Asia rally had been aided by expectations that the Fed might slow down the pace of rate hikes after another big increase next week.

“Central banks will be raising interest rates and risk of recession is still there.”

A poll by Reuters showed economists once again cut growth forecasts for key economies, with the global economy approaching a recession.

U.S. data on Tuesday showed slowing home price growth and souring consumer confidence, with some signs that the Fed’s aggressive rate hikes are starting to cool the labour market.

Treasuries have rallied and the yield on benchmark 10-year U.S. government debt was last down 7 bps at around 4.03 percent.

In Australia, inflation raced to a 32-year high last quarter as the cost of home building and gas surged. The surprise added pressure on the central bank to reverse a recent dovish turn, though markets doubt there will be a dramatic shift.

The Aussie dollar rallied over 1 percent.

Sterling meanwhile rose to its highest since mid-September at around $1.1579, boosted by expectations that new Prime Minister Rishi Sunak will be able to restore calm after weeks of turmoil.

China’s yuan also strengthened against the dollar, lifted after major state-owned banks were spotted selling the greenback in the previous session to stabilise the market.

Elsewhere, oil prices fell as industry data showed U.S. crude oil stockpiles rose more than expected. Brent crude futures for December fell 58 cents, or 0.7 percent, to $92.90 per barrel.