Fed hopes buoy shares, China COVID easing boosts oil

LONDON  – A relief rally in global shares entered a second day on Friday and the dollar dipped as investors bet that peaking U.S. inflation will prompt the Federal Reserve to ease the pace of interest rate hikes.

Oil prices jumped after health authorities in top global crude importer China eased some of the country’s heavy COVID curbs.

The S&P 500 and Nasdaq racked up their biggest daily percentage gains in over 2-1/2 years on Thursday after U.S. data showed prices rose less-than-expected in October.

On Friday, the MSCI all country stock index was up 1 percent, taking it back to its highest levels since mid-September.

In Europe, the STOXX index of 600 companies gained 0.6 percent, building on its 2.8 percent leap on Thursday to an 11-week closing high.

“You have got a number of Fed speakers starting to call for a step down and markets are running with that, pricing in some sort of pivot, but that is not going to happen in the short term,” said Mike Hewson, chief markets analyst at CMC Markets.

“It’s more of a sigh of relief after a cacophony of bad news over the past month or so. While the data may be improving in the U.S., it’s certainly not the case in Europe.”

Fed policymakers on Thursday signaled a more gradual approach to hiking rates, but made clear that the direction was firmly up to tame 40-year high inflation.

Market bets on the Fed raising rates by 50 basis points instead of 75 basis points increased.

In Europe, however, data on Friday showed German inflation remains elevated, with European Central Bank hawks calling for rates to rise enough to weaken growth so that prices are tamed.

Britain’s economy shrank in the three months to September at the start of what is likely to be a lengthy recession.

Britain’s finance minister Jeremy Hunt said his fiscal statement next week will include “extremely tough decisions” to restore confidence and economic stability.

John O’Toole, global head of multi-asset investment solutions at asset manager Amundi, said the reaction in stock markets to the U.S. inflation data showed investors were “pretty desperate” for good news and could be getting ahead of themselves.

“Even if we’re closer to the end than we are to the beginning of a tightening cycle, that doesn’t mean that rates are not going to stay at an elevated level for an extended period of time, and that’s something that financial markets just don’t have in their outlook,” O’Toole said.

The weaker outlook for corporate earnings and jobs has yet to be fully priced into markets, he added.

S&P 500 stock index futures rose 0.7 percent.

Dollar dive

Investors poured into risky assets after the U.S. data, with the dollar suffering its biggest daily drop in 13 years on Thursday. The greenback was down 0.5 percent on Friday.

U.S. Treasury yields moved decisively lower as investors revised down their expectations of where U.S. interest rates could peak, with the benchmark 10-year paper slippng below 4 percent to its lowest in over a month.

“It’s something the market had been waiting for a long time,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital. “There was a lot of money sitting on the sidelines.”

“The data and market reaction are reminiscent of previous cycles of optimism regarding the ease with which the Fed might quell too-high inflation,” Citi bank added.

Asian shares scaled a seven-week high, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 5.6 percent, set for its biggest one-day percentage jump since March 2020.

The index is down 23 percent for the year but is heading for a weekly gain of more than 7 percent, the biggest in more than two years as expectations of a less aggressive Fed rippled through global markets.

In China, health authorities on Friday eased the country’s heavy COVID-19 curbs, including shortening by two days the quarantine times for close contacts of cases and inbound travelers.

The country’s blue-chip CSI 300 Index was up 2.8 percent and the Hang Seng Index surged 7.7 percent.

Elsewhere, the crypto world remained gripped by the outlook for the crypto exchange FTX. Regulators froze some assets of FTX and industry peers raced to limit losses on Friday as solvency problems worsened.

The firm was scrambling to raise about $9.4 billion from investors and rivals, Reuters reported. FTX’s native token FTT was down 9 percent at $3.398, having fallen 90 percent month-to-date. Bitcoin fell 0.7 percent to $17,423.

Meanwhile, oil prices rose on Friday after the U.S. inflation data but were on track for weekly declines of more than 4 percent due to COVID-related worries in China.

U.S. crude rose 2.6 percent to $88.65 per barrel and Brent was at $95.84, up 2.4 percent on the day.